A Suppose Amrit is a student at Sacramento State. His parents give him $1200 eac

Question

A Suppose Amrit is a student at Sacramento State. His parents give him $1200 each semester to buN textbooks for his courses from the university bookstore. Currently, at the bookstore the price of a new textbook is $200 and the price of used textbook is $50. With the quantity of used books on the vertical axis and the quantity of new books on the horizontal axis, illustrate Amrit's budget line, being carefully to indicate the horizontal and vertical axis intercepts, as well as the slope. B. Suppose the bookstore raises the price of new textbooks 20% and also raises the price of used textbooks 60%. Assuming Amrit's parents continue to give him $1200 to buy textbooks, illustrate the impact of this on Amrit's budget line (being careful to indicate the horizontal and vertical axis intercepts and slope). C. Now, at these higher textbook prices, suppose that Amrit's parents decide to double the amount they give him to buy textbooks. Using an appropriate graph, and assuming Amrit wishes to maximize his utility (subject to his budget constraint) will he be better off, worse off, or you simply do not know (given the information), compared to above? D. Suppose the bookstore at Sacramento State lowers its prices back to those given in, causing Amrit's parents to return their textbook funding to $1200. Now consider Brenda, who is a student at UC Davis. Her parents also give her money to buy new and used textbooks at the UC Davis bookstore. The price of a new textbook at UC Davis is $200 and the price of a used textbook is $100. Assuming both Amrit and Brenda want to maximize their respective utilities, will Amrit and Brenda have the same marginal rate of substitution between used and new textbooks? If not, which one will have a higher marginal rate of substitution (in absolute value)?

Explanation / Answer

a) budget of the amrit is $1200. the price of the new books is $200 and the price of the old books is $50.

The table presenting the quantity purchased within the budget are:

5

b) price of new books is 240 and the price of old books is 80

ratio between quantity of new and old books are 1:12,2:9,3:6,4:3

quantity used books new books 1 20 1 2 16 2 3 4

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