Question

Please show work.

Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of $30 a day and 6 hours a day to spend on brandy and saunas. Each brandy costs $2 and takes half an hour to consume. Each sauna costs $1 and takes 1 hour to consume. (It is, unfortunately, impossible to consume a brandy in the sauna.) Seppo suddenly inherits a lot of money and now has $50 a day to spend on brandy and saunas. Since Seppo is a rational consumer, he will

a. increase brandy consumption only.

b. increase sauna consumption only.

c. increase consumption of both.

d. consume the same amounts of both goods as before.

e. We can’t tell since we are told nothing about his indifference curves.

Answer 1

Answer : The correct option is d.

According to the question Seppo has $30 to spend on consumption in a day. But he has limited time period for a day to consume which is 6 hours. He consumes two good which are not inferior. These means these goods may normal good or luxury good but there is one similar condition that is, if income increase then demand for goods increase and if income decrease then demand decrease. Here Seppo is a rational consumer and a rational consumer always maximize his consumption under his budget. Given that the cost of 1 brandy is $2 and consumption needs 1/2 hour. This means in 6 hours Seppo can consume 6×2 = 12 brandys and the cost becomes 12×2 = $24 . Again the cost of 1 sauna is $1 and takes 1 hour to consume. This means in 6 hours Seppo can Consume 6 sauna and cost becomes $6. But there is one condition that both cannot be consumed simultaneously. As $30 is the one day budget then Seppo has extra money to save after consumption and consumption is maximum here. Now if the budget raise here to $50 then it has no impact on consumption because consumption is maximum in case of budget $30. Therefore, Seppo's consumption for goods remains constant as before.