Danny likes to buy books (x1), and CDs (x2) with his monthly allowance. a) (2) Suppose that...

Danny likes to buy books (x₁), and CDs (x₂) with his monthly allowance.

a) (2) Suppose that books cost $10 each and CDs cost $20 each, and Danny has $200 from his allowance to spend this month. Write down the equation of Danny’s budget line.

b) (4) Suppose Danny’s utility function is U (x₁, x₂) = 2x₁+ x₂. What can you say about Danny’s preferences for books and CDs. What is Danny’s optimal choice of books and CDs? Show the solution on a graph with the budget line and utility function.

c) (4) Suppose that additionally Danny’s Mom says that she will buy him 5 books every month. Show how the new budget line (with the gift of 5 books) will look like. What will Danny’s new optimal choice be?

d) (3) If Danny is able to buy the first 5 books at regular price, all additional books are half price, draw Danny’s new budget line.

Solutions

Expert Solution

Rahul Sunny answered 1 month ago

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