Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 18

Susan Pettit's preferences for coffee (by the pound) and doughnuts (by the dozen) can be characterized as follows:

a. If the ratio of relative prices is ( P x /P y ) = 6/3 = 2, and Susan's income is $90 per period, what combination of pounds of coffee and dozens of doughnuts will she choose
b. Now let the ratio of coffee to doughnut prices decline to unity (=1), holding the price of doughnuts constant. How does Susan respond to the reduction in the relative price of coffee
c. Redo parts (a) and (b) for the case of income of $60 per period.
d. Derive Susan's demand function for coffee.
e. Is coffee a normal or inferior good for this consumer
f. Does Susan consider coffee and doughnuts to be either perfect complements or perfect substitutes Explain.