3. Ma consumes two goods: beer and beer nuts. Her utility function is Ma has a...

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3. Ma consumes two goods: beer and beer nuts. Her utility function is Ma has a daily income of $16, which she spends on these two goods. The price of her preferred beer is $4 (micro brew) and nuts is $2 per bag. Find Mas optimal consumption bundle. Free of charge Ma signs up to a frequent drinker club and the price of her preferred beer reduces to $2 under the scheme. Find the Income and Substitution Effects ofthe decrease in the cost of beer for Ma. Is beer and nuts a nořmal or inferior good for Ma. Explain your answer based on your solution in part b). a) b) c)

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Answer 1

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a)budget coustraint ヲ 3N 8 B=3 b) M- 16 ヲ (3) (2-4) ond b udect die line voN 16 13 IE = M , P

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