Suppose you are interested in purchasing just ice cream and cake for an upcoming birthday party. Assume you have only $45 to spend, the price per cake is $10 and the price per package of ice cream is $5. You have estimated the utility (or satisfaction) from the consumption of cake and ice cream according to the following tables.
ICE CREAM CAKE
Quantity Total Utility Quantity Total Utility
0 0 0 80
1 100 1 130
2 175 2 250
3 225 3 350
4 250 4 425
5 260 5 465
a. How many cakes and packages of ice cream should you purchase for the party? Why?
b. Now suppose the price of cake falls to $7.50. Now how many cakes and packages of ice cream should you buy for the party? Why?
c. How is the observed change in the quantity demanded of cake and the decrease in he price of cake related to the law of demand?