There are two goods – c and p. The utility function is U (P,C) = P...

There are two goods – c and p. The utility function is U (P,C) = P ^0.75 C ^0.25. $32 is allocated per week for the two goods, c and p.

The price of p is $ 4.00 each, while the price of c is $ 2.00 each. Solve for the optimal consumption bundle.
Suppose that the price for good p is now $ 2.00 each. Assuming nothing else changes, what is the new optimal consumption bundle.
Draw the appropriate diagram to show the results. Carefully explain the graphical representation of the fall in the price of p. Assume that both goods are normal goods.

Expert Solution

Rahul Sunny answered 2 years ago

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