Question
Consider two commodities: classical records and rock and roll records. Suppose that Melody loves classical music more and she always thinks that 2 rock and
Consider two commodities: classical records and rock and roll records. Suppose that Melody loves classical music more and she always thinks that 2 rock and roll records are a perfect substitute for 1 classical records. Assume that she prefers more to less.
Task 1: Suppose Melody faces prices from a record store at $10 per record for classical records and $20 per record for rock and roll records and she has an income of $40 to spend on records. How much does she demand of each types of records? Illustrate your answer in a commodity space with classical record being commodity 1 and rock and roll record being commodity 2.
Task 2: Hypothetically, the store can put the rock and roll records on sale at $4 per record, keeping the price of classical records at $10 per record. How much would Melody demand of each types of record in this hypothetical case, assuming an income of $40 as before? Illustrate your answer in a commodity space with classical record being commodity 1 and rock and roll record being commodity 2.
Step by Step Solution
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Task 1 Given the prices and Melodys preferences we can set up Melodys utility maximization problem M...Get Instant Access to Expert-Tailored Solutions
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