Question

If the monthly optimal level of restaurant meals vs. pairs of shoes is 8 and 3, respectively, and this costs you $700 ($50/day at restaurants and $100 per pair of shoes), what would be the various combinations of restaurant visits and pairs of shoes purchased if you go to spending $1000 per month. Assume restaurant visits and shoes are normal goods. Of these identified new combinations at the higher level of income, which make sense, and which are ruled out? Give a rationale.

Answer 1

A normal good is a good that experiences an increase in its demand due to a rise in consumers' income. In other words, if there's an increase in wages, demand for normal goods increase.

Therefore, Demand for both the goods i.e. day at restaurants and pair of shoes should increase with increase in the income.

There could be various combinations of restaurant visit and shoe purchase at the higher level of income, such as:

(a) 8 days at restaurants and 6 pair of shoes

(b) 10 days at restaurants and 5 pair of shoes

(c) 12 days at restaurants and 4 pair of shoes

(d) 14 days at restaurants and 3 pair of shoes

As stated in the question day at restaurants and pair of shoes are normal goods, then it is obvious that demand for both the goods should increase.

Also, keeping the optimum level given (8:3) in mind we should select an option which makes sense to the income distribution between both the goods.

Therefore, out of alll the combinations available, option (C) is the one which makes sense. 12 days at restaurants and 4 pair of shoes ($50/day at restaurants and $100 per pair of shoes) will cost $1000.