Question

In: Economics

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.

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