Question

A consumer has $100 of income to spend on books and other goods (a composite good). Books cost $20 each and the consumer’s optimal bundle is to consume purchase three books while spending the rest of the income on the composite good. The consumer is then given a gift of a book. Assume the consumer is unable to sell the book. Use two separate graphs to demonstrate each of the two possible scenarios: i. A consumer that is indifferent between the book gift and a cash gift of $20. ii. A consumer that strictly prefers a $20 cash gift to a book.

Please explain in detail.

Answer 1

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