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Unformatted text preview: (c) Suppose Paul spends all his income on DVDs. How many can he buy and what is his utility? (d) If Paul buys 5 DVDs how many CDs can he buy? What is his utility? (4x2.5 = 10 points) 3. Ms. Caffeine enjoys coffee (C) and tea (T) according to the utility function U(C, T) = 3C + 4T. (a) What does her utility function say about her MRS of coffee for tea? What do her indifference curve look like. (b) If coffee and tea cost $3 each and Ms. Caffeine has $12 to spend on these products, how much coffee and tea should she buy to maximize her utility? Explain. What is her utility? (c) Draw the graph for her indifference curve map and her budget constraint, and show the utility-maximizing equilibrium point. (d) What would she do if the price of coffee fell to $2, while that of tea remaining unchanged? Explain and also show the new equilibrium in your graph. (2+3+2+3 = 10 points)...
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- Spring '08