Two budget constraints and the two optimal bundles

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Reference no: EM13740147

1. Boris budgets $40 week for his morning coffee with milk. He likes it only if it is prepared with 3 parts coffee, 2 part milk U= min{3/2M,C}. Coffee costs $2/oz, milk $1/ oz. (For the questions below, show your work briefly)

A. How much coffee and how much milk Boris buy per week?

B. How much coffee and how much milk Boris per week if the price of coffee rises ro $6 / oz?

C. Graph the two budget constraints and the two optimal bundles with coffee on the x-axis. On the graph, show how much of the total change is due to the income effect? How much to the substitution effect?

Reference no: EM13740147

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