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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