Question
Joe has the following utility function: (, ) = 3x+ , where is his consumption of candy bars, with = $1, and is coffee, with
Joe has the following utility function: (, ) = 3x+ , where is his consumption of candy bars, with = $1, and is coffee, with = $2.
(a) Assume that his income is $100. How many candy bars and how much coffee will Joe consume?
(b) Suppose the price of coffee decreases from $2 to $1. What is the total effect of the price decrease on Joe's consumption of coffee?
(c) What is the substitution effect? What is the income effect?
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Principles of Macroeconomics
Authors: Karl E. Case, Ray C. Fair, Sharon E. Oster
12th edition
134078802, 978-0134078809
