Susan buys bagels and falafels. The price of a falafels is £1 and the price of a bagels is £3. Susan has £12 to spend on bagels and falafels. a) Draw Susan's budget constraint and a possible indifference curve. Explain the assumptions behind the shape of the indifference curve you have drawn. b)If the price of falafels falls to £0.80 each, how will this affect her purchases? Answer in words and graphically, clearly indicating income and substitution effects of the price change. c) If Susan only enjoys bagels and falafels when she has 2 falafels for every bagel that she eats, draw her indifference curves. How many bagels and falafels should she buy to maximise her utility? Assume Susan has £12, one falafel costs £0.80 and bagels costs £3 each.

Susan buys bagels and falafels. The price of a falafels is £1 and the price of a bagels is £3. Susan has £12 to spend on bagels and falafels. a) Draw Susan's budget constraint and a possible indifference curve. Explain the assumptions behind the shape of the indifference curve you have drawn. b)If the price of falafels falls to £0.80 each, how will this affect her purchases? Answer in words and graphically, clearly indicating income and substitution effects of the price change. c) If Susan only enjoys bagels and falafels when she has 2 falafels for every bagel that she eats, draw her indifference curves. How many bagels and falafels should she buy to maximise her utility? Assume Susan has £12, one falafel costs £0.80 and bagels costs £3 each.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.7P

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