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Farah has a monthly budget of $250. Farah consumes good D and good E. The price of good D is $10 and price of good
Farah has a monthly budget of $250. Farah consumes good D and good E. The price of good D is $10 and price of good E is $2.5. a. Her utility function is given by U(Xo, XE) = XDXE where MUD= XE and MUE = XD. She is very worried that the price of good D has increased to $15. She is struggling to understand what she will be able to afford now. Can you help her find out what consumption bundle she should consume now? Show all calculations and plot good D on the x-axis. Mark the optimal bundle she could afford before the price change with A and the new optimal bundle als B. b. Farah asks you how much worse-off is she after the price change. What would you tell her? c. Farah comes back to you and tells you that she made a mistake. She actually thinks of good D and E as substitutes such that she is indifferent between two units of good E and one unit of good D. Please help her understand in this case what would happen if the price of good D stays at $10 but the price of good E increases to $5. Please write down her utility function, calculate what she was consuming before the price change what she is consuming now after the price change, and whether she is worse-off, same, or better-off after the price change
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