Professor Petro considers coffee from La Prep (denoted as good !) and coffee from Tim Horton's (denoted as good h) to be perfect substitutes but he derives much more utility from La Prep coffee. In fact, he thinks 1 cup of coffee from La Prep is as good as 4 cups of coffee from Tim Hortons! This means his utility function over the two coffees is given by U=4l+h. The price of La Prep coffee is p = 3 and the price of Tim Horton's coffee is pa 1.5. Professor Petro sets aside a total income of m = 60 for coffee each week. For the questions below, treat La Prep coffee (good !) as the good that goes on the horizontal axis of an indifference curve diagram. (b) Solve for Professor Petro's optimal bundle of La Prep and Tim Horton's coffee, (, h"). Show your solution graphically by placing La Prep coffee on the horizontal axis and Tim Horton's coffee on the vertical axis. Label Professor Petro's optimal bundle as bundle "A" and be sure to label all intercepts of the budget line.
Professor Petro considers coffee from La Prep (denoted as good !) and coffee from Tim Horton's (denoted as good h) to be perfect substitutes but he derives much more utility from La Prep coffee. In fact, he thinks 1 cup of coffee from La Prep is as good as 4 cups of coffee from Tim Hortons! This means his utility function over the two coffees is given by U=4l+h. The price of La Prep coffee is p = 3 and the price of Tim Horton's coffee is pa 1.5. Professor Petro sets aside a total income of m = 60 for coffee each week. For the questions below, treat La Prep coffee (good !) as the good that goes on the horizontal axis of an indifference curve diagram. (b) Solve for Professor Petro's optimal bundle of La Prep and Tim Horton's coffee, (, h"). Show your solution graphically by placing La Prep coffee on the horizontal axis and Tim Horton's coffee on the vertical axis. Label Professor Petro's optimal bundle as bundle "A" and be sure to label all intercepts of the budget line.
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.10P
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Transcribed Image Text:(c)
It turns out La Prep imports its coffee beans from abroad and a big hurricane
has drastically reduced the supply of coffee beans, causing the price of La Prep's
coffee to sky rocket to a higher price of p= 7.5. Solve for Professor Petro's new
optimal bundle at these prices. Label it as bundle "B" and label all intercepts
associated with the new budget line
(d)
Based on your answers to parts (b) and (c) above, are La Prep coffee an
Tim Horton's coffee gross substitutes, gross complements, or neither?
Transcribed Image Text:7. Professor Petro considers coffee from La Prep (denoted as good I) and coffee from
Tim Horton's (denoted as good h) to be perfect substitutes but he derives much more
utility from La Prep coffee. In fact, he thinks 1 cup of coffee from La Prep is as good
as 4 cups of coffee from Tim Hortons! This means his utility function over the
two coffees is given by U = 4l +h. The price of La Prep coffee is p = 3 and the
price of Tim Horton's coffee is pa 1.5. Professor Petro sets aside a total income of
m = 60 for coffee each week. For the questions below, treat La Prep coffee (good !)
as the good that goes on the horizontal axis of an indifference curve diagram.
(b) Solve for Professor Petro's optimal bundle of La Prep and Tim Horton's
coffee, (, h"). Show your solution graphically by placing La Prep coffee on the
horizontal axis and Tim Horton's coffee on the vertical axis. Label Professor
Petro's optimal bundle as bundle "A" and be sure to label all intercepts of the
budget line.
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