question archive Ellie spends £20 on Energy drink (E) and Juice (J)
Ellie spends £20 on Energy drink (E) and Juice (J)
Subject:ManagementPrice: Bought3
Ellie spends £20 on Energy drink (E) and Juice (J). Her preferences for these goods can be described by the following utility function: U ( E,J) = 2E + J^2 ( J squared) - J (MUt = 2, MUj = 2J - 1) Suppose that one energy drink costs £1.60 while one carton of Ellie's favourite Juice costs £4.00.
a) Find Ellie's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning.
b) Discuss how Ellie's optimal consumption choice would change when her disposable budget changes.
c) If the price of energy drinks increases to £2.00 per can, how should the price of Juice change so that Ellie can be as well off as before this change in prices?
d) Discuss the implications of the price change from c) on Ellie's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Ellie's demand for Energy drink and/or Juice.
