First the relative price of videos and books changes the price of videos in

First the relative price of videos and books changes

This preview shows page 9 - 11 out of 11 pages.

Image of page 9
Videos 7.Judy lives in Utah and has $60 per week to spend on wine and chocolate. Suppose that the price of wine is $12 per bottle and the price of chocolate is $2 per bar. a.Draw Judy’s budget constraint for wine and chocolate, putting wine on the x-axis. Be sure to label the x-intercept, the y-intercept and the slope of the budget constraint. b.Now suppose that Judy moves to California where the price of wine is only $10 per bottle. Suppose that the price of candy bars is still $2 and suppose that Judy still has $60 per week to spend on wine and chocolate. On the same graph as above, draw Judy’s budget constraint for wine and chocolate in California. Be sure to label the x-intercept, the y-intercept and the slope of the budget constraint. c.If Judy moves from California to Utah, show what will happen to her optimal consumption of wine? If you need to make any additional assumptions, state clearly what they are. d.If Judy only cares about wine and chocolate, will she be better off living in California or Utah? a. See below. b. See below.
Image of page 10
c. See below. In the picture, it is assumed that chocolate and wine are substitutes. d. She’ll be better off in California because the price of wine is lower there. As a result, her affordable set will be bigger in California than Utah and she’ll be able to achieve a higher level of utility. Wine Chocolate 5 30 |Slope|=6 6 A B C SE IE TE |Slope|=5
Image of page 11

You've reached the end of your free preview.

Want to read all 11 pages?

  • Winter '08
  • Foster
  • Utility

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture