2. Suppose Emily's satisfaction remains as shown in the table in part 1 of this problem, her weekly allowance is still $16, and the price of a magazine is still $3, but the price of a latte falls to $1. a) b) c) d) Add another column to the table showing the MU per dollar spent on lattes at the new price. Now how many magazines and how many lattes will Emily consume if she wishes to maximize her utility? Explain. Look at your answers to questions 1.c) and 2.b) regarding the quantity of each good that Emily will consume. What can you determine about the relationship between magazines and lattes? Explain. Given the change in the price of lattes and the resulting change in the quantity demanded of lattes, draw Emily's demand curve for lattes. (Also consider the following: why are you not also being asked to draw Emily's demand curve for magazines?)
3. Now suppose that Emily's parents find out that she is now able to buy lattes for $1 each and so they decrease her weekly allowance to $12. a) How many magazines and how many lattes will Emily consume now? Why? b) Look at your answers to questions 2.b) and 3.a). What can you determine about the nature of magazines and lattes as they relate to income? Explain.
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