Suppose that with a budget of $160, Deborah spends $96 on sushi and $64 on bagel

Question

Suppose that with a budget of $160, Deborah spends $96 on sushi and $64 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels. a. How many pieces of sushi and how many bagels did Deborah consume before the price change? Pieces of sushi =_______ Bagels = _______ b. At the new prices, how much money would it have cost Deborah to buy those same quantities (the ones that she consumed before the price change)? $._______ c. Given that it used to take Deborah’s entire $160 to buy those quantities, how big is the income effect caused by the reduction in the price of bagels? $._________

Explanation / Answer

a) Pieces of sushi = Total expenditure on sushi / Price of sushi = $ 96 / $ 2 = 48

Bagels = Total expenditure on bagels / Price of bagel = $ 64 / $ 2 = 32

b) To purchase 48 pieces of sushi, now Deborah has to spend = 48 X 2 = $ 96

To purchase 32 units of bagel, Deborah has to spend = $ 32

Total money needed = $ 96 + $ 32 = $ 128

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