Imagine that you consume only two goods: bagels and coffee. The utility function is characterized by U(Qc , Qb) = Q c^3/4 Qb ^9/4
The price of bagels is $5 and the price of coffee is $2 and your income is $100
a.) What is the optimal consumption bundle? What is the level of utility that you get from consuming this bundle?
b.) Calculate the share of income that is spent on each good. c.) Suppose now pc = 3, what is the new consumption bundle?
d.) Your mom is concerned with your ability to focus and wants to give you enough money so you can afford your original level of consumption at the new prices. How much money should your mom give you?
e.) Your dad is upset that your mom will give you too much money and instead he wants to give you enough money to preserve your utility. Finding the substitution bundle, find out how much money your dad will give you
f.) Who do you love more?
g.) Graph the two scenarios. Make sure to include the 2 budget constraints that reflect the amounts received from each parent.