1.8. Cal “Cool” Cooper has $200 to spend on cell phones and sunglasses.

a. Each cell phone costs $100 and each pair of sunglasses costs $50. Which bundles lie on Cal’s budget line? Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on cell phones and the marginal utility per dollar spent on sunglasses are illustrated. Use this diagram and the optimal consumption rule to decide how Cal should allocate his money. That is, from all the bundles on his budget line, which bundle will Cal choose? The accompanying table gives his utility of cell phones and sunglasses.

b. The price of cell phones falls to $50 each, but the price of sunglasses remains at $50 per pair. Which bundles lie on Cal’s budget line? Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on cell phones and the marginal utility per dollar spent on sunglasses are illustrated. Use this diagram and the optimal consumption rule to decide how Cal should allocate his money. That is, from all the bundles on his budget line, which bundle will Cal choose? The accompanying table gives his utility of cell phones and sunglasses

c. How does Cal’s consumption of cell phones change as the price of cell phones falls? In words, describe the income effect and the substitution effect of this fall in the price of cell phones, assuming that cell phones are a normal good.

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Quantity of cell phones Utility from cell phones (utils) Quantity of sunglasses (pairs) Utility from sunglasses (utils) 0 0 0 0 1 400 2 600 2 700 4 700