Question

2. A consumer alternates visits to her parents and minutes of cell phone conversation with them. Her utility function is U(V,C)=VC+V where V is number of visits permonth and C is number of hundreds of calling minutes per month. The price per visit (transportation) is $2 ; the price per hundred minutes is $8 and monthly income assigned to family relations is $44.

   1. a) Derive the equation representing the consumer’s demand for number of visits (V).

   2. b) Visiting home becomes more expensive because a rise in the price of transportation, so now price per visit = $24. What will be the new equilibrium of this consumer? Compute his substitution and income effect and represent it in a diagram.

Answer 1