6. Diane consumes lemons and bottles of water, which are denoted by I and w, respec- tively. She likes to squeeze the lemon juice into her water to spice things up a little! Her utility from consuming these two goods is given by the function U =w. The price of a lemon is p =2 and the price of a bottle of water is p = 5. Diane's income is m 30. For the questions below (which continue on the next page), treat lemons as the good that goes on the horizontal axis of an indifference curve diagram.
6. Diane consumes lemons and bottles of water, which are denoted by I and w, respec- tively. She likes to squeeze the lemon juice into her water to spice things up a little! Her utility from consuming these two goods is given by the function U =w. The price of a lemon is p =2 and the price of a bottle of water is p = 5. Diane's income is m 30. For the questions below (which continue on the next page), treat lemons as the good that goes on the horizontal axis of an indifference curve diagram.
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter20: Consumer Choice And Elasticity
Section: Chapter Questions
Problem 4CQ
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Transcribed Image Text:6. Diane consumes lemons and bottles of water, which are denoted by I and w, respec-
tively. She likes to squeeze the lemon juice into her water to spice things up a little!
Her utility from consuming these two goods is given by the function U-1w. The
price of a lemon is p = 2 and the price of a bottle of water is P = 5. Diane's income
is m = 30. For the questions below (which continue on the next page), treat lemons
as the good that goes on the horizontal axis of an indifference curve diagram.
Transcribed Image Text:Solve for her optimal bundle of lemons and water shows (1*, w*). Show your
solution graphically by placing lemons on the horizontal axis and water on the
vertical axis. Label Diane's optimal bundle as bundle "A" and be sure to label
all intercepts of the budget line.
(d)
Diane's income increases to m' = 60 (prices stay the same). Solve for her ne
optimal bundle at this income level. Show your solution graphically, labeli
the new bundle as "B" and label all intercepts associated with the new bud
line. Based on your answer, are lemons a normal or inferior good?
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