Question: Laurenlovesreadingbothe-books(E)andpaper-books(P).Herutilityfunctionis given by: U ( E,P )= E + P AssumethatLaurenhas$30tospendonbothtypesofbooksandthatthepriceof e-books, P e , is $2, while the price of paper-books, P p ,

  1. Laurenlovesreadingbothe-books(E)andpaper-books(P).Herutilityfunctionis given by:

U(E,P)=E+P

AssumethatLaurenhas$30tospendonbothtypesofbooksandthatthepriceof e-books,Pe, is $2, while the price of paper-books,Pp, is $5.

  1. WhatdoesLauren'sutilityfunctionrevealaboutherwillingnesstosubstitute e-books and paper-books (e.g., are the two goods imperfect substitutes, perfect substitutes, orperfectcomplements).DrawaplotofLauren'sindifferencecurves with paper-books (P) on the vertical axis.
  2. What is the equation for Lauren's budget line?Draw it (with P on the vertical axis), and label the slope and intercepts.
  3. Inathirdplot,combineLauren'sbudgetconstraintwithherindifferencecurves to find her utility maximizing bundle of e-books and paper-books.Interpret your answer.

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