Currently Paula is maximizing utility by purchasing 5 TV dinners (T) and 4 deli meals (D) each week. The TV dinners cost $2 each, and Paula spends $23 on her meals.
a. Graph Paula's budget constraint and initial utility-maximizing choice, putting deli meals on the x-axis.
b. Write down the equation for the budget constraint - what is its slope?
c. Suppose the price of TV dinners increases by $1 and the price of deli meals falls by $1.25. Can Paula still afford to buy her original set of meals? What does this tell us about the new budget constraint in relation to the old one?
d. Add the new budget constraint to your graph (label carefully). Explain whether Paula will be worse off, better off, or the have the same utility when she maximizes her utility subject to the new budget constraint.