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John optimal consumption point

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Reference no: EM131732507

John loves to ski. To enjoy that sport he buys skis and bindings (a device to connect the ski boots to the ski). Each ski needs a binding. Assuming that John spend his entire budget for sports equipment ($1200) on these two goods and the price of skis is $200 each and the price of bindings is also $200 each.

(a) With the aid of a diagram show John's optimal consumption point. What is the quantity of skis and bindings he buys?

(b) Now suppose that the price of bindings fell to $100 each, what are the substitution and income effects of this price fall. Explain your answer and show it graphically.

Reference no: EM131732507

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