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Q1) The Smiths have two sons, Nate and Tim, who both go to college. Their parents give both boys allowance for food and textbooks. (For simplicity, suppose Nate and Tim have identical preferences between food and textbooks and that both are normal goods). Nate attends University of Tennessee and Tim attends Berkeley (where food prices are higher). Both boys purchase their textbooks from online store with free shipping and no tax.

a) Using indifference curves and budget constraints, illustrate choices of Nate and Tim if Smiths give both boys same monthly allowance. (use graph for each person, but make sure graphs can be compared, same scale)

b) The Smiths realize that Berkeley is more expensive than Knoxville and want both boys to be equally well off. Illustrate in your diagram how Smiths should compensate Tim.

c) Describe how your answer relates to income and substitution effects of price change from Knoxville food prices to Berkeley food prices.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M922935

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