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Unformatted text preview: b. Because one unit of tea provides more utility than a unit of coffee, she will spend all of her income on tea when the prices are equal: T = 4, C = 0 . c. The graph shows that the indifference curves are steeper than the budget constraint, so maximum occurs on the T axis. d. With more income she would continue to buy only tea. If coffee prices fall to $2, coffee is now a cheaper way to obtain utility one unit of coffee yields 3 units of utility at a cost of $2 so utility costs $2/3 per unit of utility. With tea, utility costs $3/4 per unit of utility....
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This note was uploaded on 02/22/2011 for the course ECON 3000 taught by Professor Fung during the Fall '09 term at CUNY Hunter.
- Fall '09