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Malachi only consumes 2 goods: DVD rentals and coffee. His utility function is where is the…
Malachi only consumes 2 goods: DVD rentals and coffee. His utility function is
is the number of rentals and is cups of coffee. Malachi has $16 in his pocket right now, and he plans to spend all of the $16 on DVD rentals and coffee today.
b) Suppose that Malachi signs up for a membership that reduces the price of a rental to $2, while leaving his income unchanged.
Find the substitution effect, income effect and total effect of the decrease in the price of video rentals on Malachi’s consumption of rentals and coffee.