Elle Driver likes pizza (X) and clothing (Y) and her utility is given by U= XY...

Elle Driver likes pizza (X) and clothing (Y) and her utility is given by U= XY . Her income is $20 and the price of food P_x = $ 5 and clothing P_y = $2. -
1. Draw a diagram with Y on the vertical axis and X on the horizontal axis and determine Elle’s optimal basket. Show your work.
2. Elle’s friend, Jules Winnfield, likes Big Kahuna burgers and recently learned of a promotion where if you buy one Kahuna Burger at the full price of $10, the next three burgers are only $5 each. Jules’ income is $40 and the price of all other goods he consumes is $1 per unit.
  1. Draw a budget constraint for Big Kahuna Burgers and all other goods that reflect the situation before the special offer was announced and one for after the special price offer was announced (that is draw 2 budget lines). Put Big Kahuna Burgers on the horizontal axis. Be sure to indicate the intercepts and the slopes of the budget lines.
  2. How will the special promotion on Big Kahuna Burgers affect Jules’ buying behavior? How will your answer depend on the shape of Jules’ indifference curves? Explain and show in the diagram.

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Rahul Sunny answered 1 year ago

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