Question

1. Joaquin consumes pizza and beer. His utility function is  

?(?, ?) = ??

where P is the number of pizzas and B is glasses of beer. Joaquin has $30, and he plans to spend all of it on pizza and beer today.

Price of pizza is $10, price of beer is $3 per glass. Optimal bundle is P=1.5, B=5.

1. 1. Suppose that during happy hour Joaquin can get beer for $2. Find the substitution effect, the income effect, and the total effect of the decrease in the price. Use the Lagrangian method.
2. 2. Are pizza and beer normal or inferior goods for Joaquin? Explain.

Answer 1

b) beer and pizzas are normal goods for consumer because price of beers falls his beer consumption increases I.e. he demands more of beer and as his real income increases due to price fall his pizza consumption also increases thus both are normal goods