Tony likes nuts (N) and berries (B). He has a monthly income of $200 to spend on these two goods. The price of nuts stays at $4 around the year because nuts are so easy to store, but the price of berries varies a lot. Last year the price of berries was $5 in August; but in December it reached $8.
a. Write the equations of Tony’s budget lines in August and in December. Graph these budget lines (put nuts on the y-axis and berries on the x-axis).
b. Being a rational consumer, at August prices Tony purchased 25 nuts. How many berries did he consume in August? What was the marginal rate of substitution at the optimal consumption bundle?
c. After three months of price growth, in December Tony consumed 20 nuts. What was his consumption of berries? What kind of goods are berries and nuts for Tony?
d. It is known that Tony’s demand for berries is linear. Using your answers to questions (b) and (c), derive his demand function.