Question

Arlo is very health-conscious and consumes only two goods, rice cakes and quinoa. His utility function is ?(?,?)=?2?u(r,q)=r2q, where ?r is the number of packs of rice cakes he consumes and ?q is ounces of quinoa. The price of a pack of rice cakes is $4, and the price of an ounce of quinoa is $8. Arlo has $720 to spend this week on these two goods. Suppose that the price of quinoa suddenly falls to $4.

A)Before the price change, Arlo consumed____packs of rice cakes and____ounces of quinoa per week.

B)If, after the price change, Arlo's income had changed so that he could exactly afford his old consumption bundle, his new income would have been $ ______. With this income and the new prices, Arlo would consume___packs of rice cakes and     ounces of quinoa.

C) Does the substitution effect of the fall in the price of quinoa make Arlo buy more quinoa or less quinoa?

How many ounces more quinoa or less quinoa?

D)The income effect of the fall in the price of quinoa, on Arlo's demand for quinoa, is equivalent to  

  in his income of $    per week.

Does the income effect make him consume more quinoa or less?  

  How much more or less?    ounces of quinoa

Answer 1

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