Answer to Question #130238 in Microeconomics for Gavin

Question

QUESTION 1:
Lyabola receives utility from days spent traveling on vacation domestically (D) and days spent traveling in a foreign country (F) as given by the utility k = DF. The price of a day spent traveling domestically is K160 and in a foreign country K200. Lyabola’s annual budget for traveling is K8,000
Answer the following questions:
a) Draw the budget line for Lyabola based on calculations and (without calculating) indicate a potential utility maximizing point using an indifference curve
b) Suppose that the price of domestic traveling increases to K250 per day. Calling his budget for traveling x, (suppose by now that it is unknown) find the new budget line and the utility maximizing point on the new budget set.
c) Show a point indicating the income necessary to make Lyabola reach the same utility level as before the price change.

Answer 1

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