Question 3. Nikhil earns $1500 a month. For simplicity let's say there are two goods in this economy, fun activities (f) with price , and necessities (n) with price .

Part 1. First, assume that Nikhil has traditional neo-classical model. a) Write down his utility maximization problem for one month.

b) One month, Nikhil gets an unexpected gift of $100 in cash. Write down his utility maximization problem for that month.

c) Why is typically assumed that under the rational model that people are always better off receiving a gift of cash?