Oscar consumes both video games and Pepsi.

a. Given the table, what is Oscar’s total utility from purchasing three video games and 2 Pepsis?

b. Assume that Oscar has a weekly income of $20. If the price of a video game is $5 and the price of Pepsi is $2, what quantity of video games and Pepsi maximizes Oscar’s utility (he does not use his money for any other purchases)?

c. Assume that the price of Coca Cola drops. Does this increase, decrease, or not change Oscar’s demand for Pepsi?

d. Suppose that Oscar’s income elasticity for Pepsi is -0.5. Does the value of Oscar’s income elasticity indicate that Pepsi is a normal good, an inferior good, a substitute, or a complement?

e. Suppose that when the price of video games increases by 20 percent, Oscar buys 10 percent fewer video games and 2 percent less of other computer equipment. Calculate the cross-price elasticity for video games and computer equipment and indicate if it is positive or negative.

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batolisis batolisis · Answer 1 · 2022-07-12T17:17:15+02:00

A) Oscar's Total utility from purchasing 3 video games and 2 pepsis = 21

B) The quantity of video games and Pepsi maximizes Oscar’s utility = 2 video games and 5 Pepsi

C) When the price of Coca cola drops : Oscars' demand for pepsi will drop

D) Pepsi is an Inferior good because it has a negative income elasticity

E) The cross-price elasticity for video games and computer equipment is : Positive

A) The total utility from purchasing 3 video games and 2 pepsis

marginal utility of 3 videos games = 12

marginal utility of 2 pepsi = 9

therefore total utility = 12 + 9 = 21

B) The quantity of video games and Pepsi maximizes Oscar’s utility

The quantity of video games with the maximum utility ( 20 ) = 1

The quantity of video games with the maximum utility ( 10 ) = 1

Given that :

Oscars weekly income = $20

price of video game = $5

price of pepsi = $2

After the first purchase of video games and pepsi

$20 - $7 = $13

after the next purchase

$13 - $7 = $6

The balance $6 will purchase 3 more pepsi

Therefore the quantity of Video games to be purchased = 2 ( $10 ) (i.e. 15 utility )

Quantity of Pepsi to be purchased = 5 ( $10 ) ( i.e. 6 utility )

C) When the price of Coca cola drops Oscars' demand for Pepsi will drop as Coca cola is a competitor/superior product.

D) Pepsi is an inferior good

E) The cross price elasticity for video games and computer equipment is positive

Hence we can conclude that the answers to your question are as listed above

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