Posted by kristy on Tuesday, February 2, 2010 at 11:54pm.
1. Ned reads textbooks (y) and harlequin romance novels (x). He sends about $250 per quarter on books.
His demand for textbooks can be written m
2py
and his demand for harlequin romance novels is m
2px
.
(a) Textbooks cost $30 while romance novels cost $10. Draw a graph representing Ned's indiference
curve and budget line. How many units of each does Ned consume?
(b) Competition in the industry drives the price of Harlequin romance novels down to only $5. How
does Ned's bundle change? Be exact. The university is troubled by Ned's changed reading habits
and concocts a plan. They will raise student fees, efectively reducing Ned's budget for books,
thus reducing his reading of trashy Harlequin romance novels, making him study his textbooks
harder. How much must the university reduce Ned's budget so he can just consume his original
bundle of books?
(c) Does Ned return to his old reading habits after the university's plan goes into eect? After
experiencing the reduction in his budget, does Ned consume the same bundle he consumed before
the price change? Why or why not? Again, be exact.
(d) What are the exact income and substitution effects of the price change? (hint the first three parts
of the problem will help you) Show it on a graph.

economics  economyst, Wednesday, February 3, 2010 at 10:32am
I don't understand your demand equations. You state the demand for text books is:
m
2py
Could you elaborate and explain your terms?
I would expect the demand function for text books to be some function of the price of text books and income.
Regardless, the questions you ask really don't require the demand for text books per se. The questions relate to the marginal rate of substitution between text books and harlequin books.
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