Colin Kreevy, a student of economics, has only $20 of his monthly budget left. He wants...

Transcribed Image Text:

Colin Kreevy, a student of economics, has only $20 of his monthly budget left. He wants to spend this amount on movies and burgers and decides to apply the tools of consumer behavior to find his utility maximizing combination of the two. Based on his experience in watching movies and eating burgers, Colin calculates the approximate level of utility he expects to enjoy at different consumption levels, shown in the following table. The table also shows his marginal utility from watching movies and having burgers. The price of a movie ticket is $8, while the price of a burger is $6. Burgers Utility MU burgers Movies Utility MU movies -- 1 40 40 1 40 40 2 70 30 60 20 3 80 10 3 75 15 4 72 -8 4 80 5 70 -2 78 -2 66 -4 6. 72 -6 When the price of a burger increases from $6 to $7.5, income and substitution effects of this price increase work in opposite directions. The overall quantity of burgers demanded by Colin, however, does decline. When the price of a movie ticket increases from $8 to $9, both income and substitutions effects work to reduce quantity demanded. Which of the following is most strongly supported by this information? A. Colin considers burgers to be inferior goods. B. The price elasticity of demand for burgers is very high. C. The law of demand holds for movies but not for burgers. D. The law of demand does not hold for movies. E. Colin considers movies to be Giffen goods. Colin Kreevy, a student of economics, has only $20 of his monthly budget left. He wants to spend this amount on movies and burgers and decides to apply the tools of consumer behavior to find his utility maximizing combination of the two. Based on his experience in watching movies and eating burgers, Colin calculates the approximate level of utility he expects to enjoy at different consumption levels, shown in the following table. The table also shows his marginal utility from watching movies and having burgers. The price of a movie ticket is $8, while the price of a burger is $6. Burgers Utility MU burgers Movies Utility MU movies -- 1 40 40 1 40 40 2 70 30 60 20 3 80 10 3 75 15 4 72 -8 4 80 5 70 -2 78 -2 66 -4 6. 72 -6 When the price of a burger increases from $6 to $7.5, income and substitution effects of this price increase work in opposite directions. The overall quantity of burgers demanded by Colin, however, does decline. When the price of a movie ticket increases from $8 to $9, both income and substitutions effects work to reduce quantity demanded. Which of the following is most strongly supported by this information? A. Colin considers burgers to be inferior goods. B. The price elasticity of demand for burgers is very high. C. The law of demand holds for movies but not for burgers. D. The law of demand does not hold for movies. E. Colin considers movies to be Giffen goods.

Answer rating: 100% (QA)

According to the equimarginal utility principle the dollar amount spent on the movie and burger sh... View the full answer