Nawaphon spends all his budget on smartphones and tablets. His utility function is U= S+T, where S stands for Smartphones and T for Tablets. The price of a smartphone is $40 and the price of a tablet is $60. Nawaphon’s budget is $120.
a. What is Nawaphon’s optimal bundle? What is his level of utility?
b. Suppose the price of smartphones increases to $80 and the price of tablets remains unchanged.
i. What budget would Nawaphon need to get the same level utility as before the price increase? What would Nawaphon’s optimal bundle be with his new budget? (Hint: Think twice, it’s allright).
ii. What bundle would Nawaphon choose if his budget was adjusted using the CPI (Consumer Price Index)? Explain your answer!
iii. Would Nawaphon be better off in i or ii? Why?