Question

Question #19: While visiting family in Mexico, your professor has a budget of $ 235 ($ = pesos) that he spends on tacos and tequila. The price of tacos is $ 7 and a shot of tequila is priced at $ 6 . During his visit the price of tacos changes to $ 6. Assume your professor has a Cobb-Douglas utility function with (tacos) parameter α = ( 27 / 100 ) . How many tacos would be consumed by your professor at the new prices assuming utility is held constant at the level associated with his original optimal consumption bundle (i.e., Xs) ? (Assume both goods are commodities.) Quantify the substitution and income effects.

Answer 1