Question

Assume that Mohammed has $100 per month to divide between dinners at a Palestinian restaurant and evenings at Jordan, a local club. Assume that going to Jordan costs $20 and eating at the Palestinian restaurant costs $10. Suppose Mohammed spends two evenings at Jordan and eats six times at the Palestinian restaurant. a. Draw Mohammed’s budget constraint and show that he can afford six dinners and two evenings at Jordan. b. Assume that Mohammed comes into some money and can now spend $200 per month. Draw his new budget constraint. c. Draw Mohammed’s budget constraint and indifference curve with shown the optimal choice (Consumer Utility-Maximizing Equilibrium) for him. d. Use your answers shown above to write the utility-maximizing rule for Mohammed. e. As a result of the increase in income, Mohammed decides to spend eight evenings at Jordan and eat at the Palestinian restaurant four times. What kind of a good is Palestinian food? What kind of a good is a night at Jordan?

Answer 1

Part (A)

if he spends his entire monthly budget on trips to Jordan

if he spends his entire monthly budget on dinners at palestinian restaurant

if he spends 2 evenings at Jordan and eats six times at palestinian restaurant

Since cost of above bundle is equal to his monthly budget. Therefore he can afford to spend 2 evenings at Jordan and eat 6 times at Palestinian restaurant

All bundles lying in budget set (shaded region)  and on the budget line are affordable

Part (B)

if his new monthly budget is $200

Part (C) & (D)

optimal choice that is the utility maximizing equilibrium is at point where slope of budget constraint is equal to slope of indifference curve

at optimal choice, marginal utility achieved from evening at Jordan is twice the marginal utility achieved from dinner at palestinian restaurant given current prices

Part (E)

. As a result of the increase in income, Mohammed decides to spend eight evenings at Jordan and eat at the Palestinian restaurant four times

As his income increases, Mohammed increases his trips to Jordan from 2 to 8 whereas reduces number of times he eats at palestinian restaurant from 6 to 4

Therefore, Evening trip to Jordan is a normal good for Mohammed and a dinner at palestinian restaurant is an inferior good

A normal good means an increase in income causes an increase in demand.

An inferior good means an increase in income causes a fall in demand.