By utility preferences graph the indifference curves

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Reference no: EM1316340

The Smiths have two sons, Nate and Tim, who both go to college. Their parents give both boys an allowance for food and textbooks. (For simplicity, assume Nate and Tim have identical preferences between food and textbooks and that both are normal goods). Nate attends the University of Tennessee and Tim attends Berkeley (where food prices are higher). Both boys buy their textbooks from an online store with free shipping and no tax.

a) Using indifference curves and budget constraints show the choices of Nate and Tim if the Smiths give both boys the same monthly allowance. (use a graph for each person, but make sure the graphs can be compared, same scale)

b) The Smiths realize that Berkeley is more expensive than Knoxville and want both boys to be equally well off. Show in your diagram how the Smiths should compensate Tim.

c) Explain how your answer relates to the income and substitution effects of a price change from Knoxville food prices to Berkeley food prices.

Reference no: EM1316340

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