ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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A consumer with $120 income and the utility function u(x,y) = (x^2)y where x is food and y clothing can go for shopping in one of the two stores A or B, where the prices for food and clothing are respectively pAx = 1, PAy = 80 and PBx = 8, PBy = 1.
(a) If she can visit only one of the stores, which one would she go and what would be her optimal bundle there? Could she afford this very bundle at the other store? (HINT: How happy would she be if she chooses to go to store A for shopping? To store B? Which one is higher and what bundle would she buy there?)
(b) If she can freely visit both stores (so that she buys each good from the store where it is sold cheaper), what would be her optimal bundle? What would she buy from each store?
(c) How much money would she be willing to give up (out of her $120 budget) for the ability to visit both stores as in (b) rather than being restricted to shopping in only one store (the one she chooses in (a)? (HINT: suppose she pays $A for this privilege. Then, with income I = 120-A, the utility of the optimal bundle when she visits both stores and buys each good from the store where it is cheaper is equal to her optimal utility in (a).
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