Question

A music lover (ML) likes going to concerts (c) and downloading songs on iTunes (s). ML's preferences are given by the following utility function

u(c,s) = cs

ML has a monthly income of $150 to allocate between downloading songs and going to concerts; the price of each good is given by Ps = 1 and Pc = 10.

(a) Depict ML's monthly budget line on a diagram with c on the x-axis and s on the y-axis. Label the axes and the slope clearly.

(b) Depict ML's new budget line for each of the following new scenarios (assuming everything else stays the same, except for the particular scenario stated in the question). Be sure to include the original budget line from part (a) on the same diagram for comparison.

i. The price of each concert has increased to Pc >10.

ii. ML's income has decreased to I < 150.

iii. There is a t% sales tax on iTunes.

iv. ML has to pay a small fixed monthly fee F in addition to the per-unit price to iTunes (this fee is not charged if ML doesn't download their music within that month).

Answer 1