“Toronto-based independent financial products comparison website pegs the price of courtship at $6,936.74. That includes a dozen “fancy dates” (nice restaurants and theatre tickets), … 36 “casual dates” (take-out food, coffee and movie rentals)…”[1]
a. Suppose there are two goods: fancy dates and casual dates. Ignoring the specific numbers above, draw the utility maximization problem for a person choosing a combination of the two goods. Think both about what your budget constraint should look like (which good is likely pricier?) and your indifference curve (what do you think the relationship between the two goods is?).
b. My friend John faces this very choice problem. Suppose I want to help him out, so I give him a big stack of Restaurant.com coupons, each of which reduces the price of a causal date by $10. Draw the effect of such coupons on the choice of dates above, identifying the substitution and income effects in addition to the overall effect. Based on what you have drawn, are casual and fancy date’s substitutes, complements, or are they (more or less) unrelated goods?