Assignment:
The price of a movie ticket is $10.00. At that price you choose to see 20 movies a year. The price elasticity of demand has been determined to be (in absolute value) 1.5. Unfortunately for you, movie ticket prices have increased to $15.
a. Use indifference curve analysis to show the initial utility maximization point. Label this point "A". Label the second utility maximization point "B". Be sure to determine the new utility maximization quantity and label.
b. Derive the equation of the demand curve corresponding to the utility maximization positions from part a. Label the utility maximization points "A" and "B" and the intercepts.
c. Calculate the change in consumer surplus due to the increased price of movies. What is the significance of this change in consumer surplus? In other words, what is the big deal about having more or less consumer surplus?
d. Illustrate and explain the income and substitution effect associated with this price change.