Suppose you are choosing between coffee and mangos. You know that your utuility function is given...
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Suppose you are choosing between coffee and mangos. You know that your utuility function is given by U=C0.75M0.25 and you have $16 to allocate between the two goods. a. Assume the price of a cup of coffee is $4 and the price of a mango is $2. Set up a Lagrangian and find your optimal consumption bundle. b. Suppose the coffee shop gets a new roaster and the price of coffee falls to $2 per cup, while your nominal income and the price of mangos is unchanged. Find the substitution effect, the income effect, and the total effect of the decrease in price of coffee on your consumption of coffee and mangos. c. Based on your answer to part b, are coffee and mangos normal or inferior goods for you? Explain your answer. Suppose you are choosing between coffee and mangos. You know that your utuility function is given by U=C0.75M0.25 and you have $16 to allocate between the two goods. a. Assume the price of a cup of coffee is $4 and the price of a mango is $2. Set up a Lagrangian and find your optimal consumption bundle. b. Suppose the coffee shop gets a new roaster and the price of coffee falls to $2 per cup, while your nominal income and the price of mangos is unchanged. Find the substitution effect, the income effect, and the total effect of the decrease in price of coffee on your consumption of coffee and mangos. c. Based on your answer to part b, are coffee and mangos normal or inferior goods for you? Explain your answer.
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Answer rating: 100% (QA)
a The Lag rang ian is L U C 0 75 M 0 25 4 C 2 M b The substitution effect is a shift in consumption ... View the full answer
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