8. Colin Kreevy, a student of economics, has only $20 of his monthly budget left

Question

8. Colin Kreevy, a student of economics, has only $20 of his monthly budget left. He wants to spend this amount on movies and burgers and decides to apply the tools of consumer behavior to find his utility maximizing combination of the two. Based on his experience in watching movies and eating burgers, Colin calculates the approximate level of utility he expects to enjoy at different consumption levels, shown in the following table. The table also shows his marginal utility from watching movies and having burgers. The price of a movie ticket is S8, while the price of a burger is $6. Utility MU burgers Movies Utility MU movics Burgers 0 40 70 80 72 70 40 30 10 40 60 75 80 78 72 40 20 15 4 4 -4 When the price of a burger increases from $6 to $7.5, income and substitution effects of this price increase work in opposite directions. The overall quantity of burgers demanded by Colin, however, does decline. When the price of a movie ticket increases from $8 to $9, both income and substitutions effects work to reduce quantity demanded. Which of the following is most strongly supported by this information? A. Colin considers burgers to be inferior goods B. The price elasticity of demand for burgers is very high. C. The law of demand holds for movies but not for burgers D. The law of demand does not hold for movies. E. Colin considers movies to be Giffen goods.

Explanation / Answer

Answer is option E) because rise in price for movies caused Colin not to spend on movies. His income and substitution cause decrease in quantity demand of movies, which means he doesn't want to spend on movies. We can see in table that MU of movies is less than burger at quantity 2. Burger price rises but Collin income and substitution effect of price increases in OPPOSITE DIRECTION.

it's clear that Collin believe movie as a giffen good in comparison to burgers.

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