Chan receives utility from days spent traveling on vacation domestically

| November 24, 2016

Question
Chan receives utility from days spent traveling on vacation domestically (D) and days spent traveling in a foreign country (F) as given by the utility U(D, F) = DF. The price of a day spenttraveling domestically is $160 and in a foreign country $200. Chan’s annual budget for traveling is $8, 000.

(a) (6 points) Find Chan’s utility maximizing choice of days traveling domestically and in aforeign country. Find also his utility level from consuming that bundle.

(b) (2 points) Suppose that the price of domestic traveling increases to $250 per day. Find Chan’s new choice of days traveling domestically and in a foreign country.

(c) (8 points) Decompose the total change into a substitution and income effect for domestic travel. Represent it graphically as well.

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