Lauren loves reading both e-books (E) and paper-books (P). Her utility function is given by: U(E, P) = E + P Assume that Lauren has $30 to spend on both types of books and that the price of e-books, Pe, is $4, while the price of paper-books, Pp, is $3.

(a) What does Lauren's utility function reveal about her willingness to substitute e-books and paper-books (e.g., are the two goods imperfect substitutes, perfect substitutes, or perfect complements). Draw a plot of Lauren's indifference curves with paper-books (P) on the vertical axis. 

(b) What is the equation for Lauren's budget line? Draw it (with P on the vertical axis), and label the slope and intercepts. 

(c) In a third plot, combine Lauren's budget constraint with her indifference curves to find her utility maximizing bundle of e-books and paper-books. Interpret your answer.

Answer rating: 100% (QA)

Lets address each part of the question a Laurens utility function UE P E P indicates that she values both ebooks and paperbooks equally and that they ... View the full answer