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In: Economics

Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M....

Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M. Last year, the price of vacations was $200 and the price of meals was $50. This year, the price of meals rose to $75, the price of vacations remained the same. Both years, Ed had an income of $1,500. Include a budget line and indifference curve diagram in your response to this question.

  1. What is Ed’s optimal consumption of vacations and meals before and after the price change?
  2. Calculate the substitution and income effects arising from the change in meal price. Are meals a normal good, and inferior good, or neither? Explain.

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Expert Solution

Rahul Sunny answered 8 months ago
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