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Question - Quasimodo consumes earplugs and other things. His utility function for earplugs (E) and other consumption (C) is given by U(E, C) = 100E - (E^2)/2 + C Normalize the price of a unit of other consumption, C, to $1 and assume he has $4000 to spend each month.
a. Derive Quasimodo's demand function for earplugs, E(P), where P is the price of an earplug. (Note: You can assume an interior solution.)
b. What is the change in consumer surplus for Quasimodo due to a decrease in the price of earplugs from $80 to $50?
c. What is the change in utility for Quasimodo due to a decrease in the price of earplugs from $80 to $50? Note: You need to use the utility function and therefore need to also know the optimal choices of C with the different prices for earphones.
d. Briefly provide an interpretation for the concept of consumer surplus in light of your results in (b) and (c) above.
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