Problem set 4 (due Thursday, February 17th, before class) Problem 1 As in the previous problem set, Benjamin spends his time either watching movies (21) (as you know he is taking advantage of "on demand" option, cable TV) or listening to the songs - MP3 downloaded from the Internet (12) His preferences are U (x1, 12) = 4Inc1+ Inc2. His total income is m = 100, the price of MP3 is one dollar (per each song) (p2 = 1). Suppose that the price of a movie drops from p1 = 10 to p1 = 5. a) By how much the "consumption" of movies changes due to the price drop? b) Are movies ordinary or Giffen goods? Explain why. c) By how much z1 changes because movies are cheaper relative to MP3 (find substitution effect) d) How about the effect of increased purchasing power of Benjamin's income? (find income effect) e) Is the income effect in d) positive or negative? Why? (Hint: is a movie a normal of inferior good?) f) Show the total change, and the substitution and income effects on the graph