Elizabeth M. Suburbs makes $200 a week at her summer job and spends her entire weekly income on new running shoes and designer jeans, because these are the only two items that provide utility to her. Furthermore, Elizabeth insists that for every pair of jeans she buys, she must also buy a pair of shoes (without the shoes, the new jeans are worthless). Therefore, she buys the same number of pairs of shoes and jeans in any given week.
a. If jeans cost $20 and shoes cost $20, how many will Elizabeth buy of each?
b. Suppose that the price of jeans rises to $30 a pair. How many shoes and jeans will she buy?
c. Show your results by graphing the budget constraints from part a and part b. Also draw Elizabeth’s indifference curves.
d. To what effect (income or substitution) do you attribute the change in utility levels between part a and part b?
e. Now we look at Elizabeth’s demand curve for jeans. First, calculate how many pairs of jeans she will choose to buy if jeans prices are $30, $20, $10, or $5.
f. Use the information from part e to graph Ms. Suburbs’s demand curve for jeans.
g. Suppose that her income rises to $300. Graph her demand curve for jeans in this new situation.
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