Question

Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of $30 a day and 6 hours a day to spend on brandy and saunas. Each brandy costs $2 and takes half an hour to consume. Each sauna costs $1 and takes 1 hour to consume. (It is, unfortunately, impossible to consume a brandy in the sauna.) Seppo suddenly inherits a lot of money and now has $50 a day to spend on brandy and saunas. Since Seppo is a rational consumer, he will:

Answer 1

Answer: consume both products at the same rate as before his inheritance.

Explanation: Seppo is a rational spender. This means that although Seppo has more money to spend on brandy and saunas, Seppo will only spend money on what Seppo needs. Seppo's inheritance will not change the amount of hours that are available in a day. Seppo will still only have 6 hours to spend, and will consume the products based on the amount of time Seppo has, instead of the extra cash Seppo can spend on these products. This means that although Seppo has more money, Seppo will still consume the same amount of products as before, as Seppo is a rational consumer who likes to weigh rational consumption choices.