Question

Robert treats coffee and creamer as perfect complements and has very specific requirements for the ratio of creamer to coffee. He will drink coffee only if he has exactly 1.00 packets of creamer for every cup of coffee. Coffee is priced at $3.00 per cup and creamer at $0.25 per packet. 

In the questions below, give your answers to two decimal places.

Part 1 

Suppose that Robert has $39.00 to spend on coffee and creamer. His optimal consumption bundle contains cups of coffee and packets of creamer 

Part 2 

Now, suppose that the price of creamer rises to $0.50 per packet. What is the substitution effect of this price change?

Answer 1

Part 1

The ratio for consumption is 1 Creamer = 1 cup of coffee

Budget line has an equation 39 = Price of creamer x quantity of creamer + Price of coffee x quantity of coffee

39 = 0.25CR + 3CU

Note that 1CR = 1CU

39 = 0.25CR + 3CR

CR = 39/3.25 = 12

Hence the consumption bundle has 12 packets of creamer and 12 cups of coffee

Part 2

There is no substitution effect in case of perfect complements. Hence select 0 packets.