Suppose a consumer purchases only two products: mystery novels (good X) and computer games (good Y)....

Suppose a consumer purchases only two products: mystery novels (good X) and computer games (good Y). The consumer’s income (budget) is $200 per period, the price of a novel (PX) is $10, and the price of a computer game (PY) is $20.

a. Determine and illustrate the budget constraint for the consumer. Be sure to specify the budget line equation in your answer.

b. Now suppose the consumer’s tastes and preferences are defined by the following Cobb-Douglas utility function: U= 10X^0.5Y^0.5 Given the information on income, prices and utility, determine and illustrate graphically the utility-maximizing combination of books and computer games for this consumer (be sure to show an indifference curve in your diagram).

c. Given the information above, determine the consumer’s demand function for novels (good x), and illustrate the demand curve over the price range of $4 to $20 (you may use increments of $2).

d. Ignoring the price changes from part c. (i.e. assume that PX = $10), suppose the consumer’s income increases to $300. Determine and illustrate graphically the new utility-maximizing combination of novels and computer games. Explain whether these goods are normal or inferior.

Expert Solution

Rahul Sunny answered 2 years ago

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