Question

Suppose Roxanne starts with $5000. Her utility of that amount of money without the trees being trimmed is 20000 (that is, (5000,0)=20000 ). Calculate her reservation price for contributing to the tree-trimming project.

Answer 1

Kimberly's increased income causes her budget constraint to shift outward, allowing her potentially to purchase more concert tickets and overnight getaways, and her utility-maximizing choice will reflect her new consumption pattern.

Step-by-step explanation:

When Kimberly's income increases to $2,000, her budget constraint shifts outward, giving her the ability to purchase more concert tickets and overnight getaways. In maximizing her utility, she will reassess the utility and marginal utility derived from each item. The income effect may allow her to consume more of both goods, while the substitution effect will alter her consumption depending on the relative prices and her preferences.

She may consume more of the good that provides greater marginal utility per dollar or may increase consumption proportionally if her utility function is homothetic. Hence, her new utility-maximizing choice will relate to her original choice by reflecting her increased purchasing power and possibly changed consumption pattern due to the substitution effect.