Question

Need detailed as possible.

Suppose that a consumer considers coffee and tea to be perfect substitutes, and 1 cup of coffee is as good as 5 cups of tee for him. The price of coffee is 2 euro per cup and the price of tea is 1 euro per cup. The consumer’s income is 20 euro. What should the consumer buy?

Wählen Sie eine Antwort:

a. 10 cups of tea and no coffee.

b. 10 cups of coffee and no tea.

c. 20 cups of tea and no coffee.

d. 5 cups of coffee and 10 cups of tea.

Answer 1

"C"

He will buy 20 cups of Coffee, for example 1 cup of coffee gives a utility of 10 , a cup of tea will also give the same utility as they are perfect substitute i.e. 10 utility. If the utility is same, the consumer will look to maximize the utility in the market. He will buy maximum amount of tea so his utility will be 10 x 20 = 200. this is not possible if he is consuming coffee because coffee is costlier.