Maria\'s preferences over weekly baskets of glasses of Wine (W) and slices of Ch
ID: 1138387 • Letter: M
Question
Maria's preferences over weekly baskets of glasses of Wine (W) and slices of Cheese (C) are partially represented in the graph below. Each week she budgets $45.00 to spend on these goods. $7.50/Glass and the price of Cheese is $2.50/Slice The current price of Wine is 3--+--+--+--+-+--+--+-+-+-+--+--+--+--+--+-+--+-- + + + | | +--+ -,-_- | | + --+ | + +--+ | 10 10 20 30 Maria maximizes her satisfaction consuming slices of cheese each week. b) 6 c) 8 e) 12 Suppose the price of wine falls from $7.50 per glass to $1.25 per glass. demanded of wine due to the substitution effect equals 7. The change in Maria's quantity -glasses of wine d) 6 Suppose the price of wine falls from $7.50 per glass to $1.25 per glass. demanded of wine due to the income effect equals The change in Maria's quantity glasses of wine In this range of prices and income we can determine that Maria considers Wine and Cheese to be goods, and she considers Wine to be a(n) good. Explain. a) substitute; normal b) substitute; inferior d) complementary; normal e) None of the above are correct.Explanation / Answer
6) The maximum wine she can consume is 6 units and the maximum cheese she can consume is 18 units. Now basically, you have two points that are(6,0) and (0,18), draw a Budget line joining these points. You will see that this Budget line will intersecting an IC at which maximum cheese that will maximize her utility will be 12 units.
7) Now due to this decrease in the price of wine, the budget line will become flatter. Now we want to find the substitution effect for this we will take back from the consumer enough money so that she can afford her original bundle which is (2,12) and money taken will be 12.5.
Now if you draw 1.25W+2.50C = 32.5 you get 10 units of wine. So, substitution effect is 10-2 = 8.
8) Now draw 1.25W+2.50C = 45 and you will see that you will get 8 units of wine. Income effect will be 8-10 = -2
9) Our original bundle is (2,12) and the final bundle is (8,14). So, due to the decrease in the price of the wine, the quantity demanded of cheese has increased. So, they are substitutes goods and yes normal.