Penny has $400 to buy college textbooks. New textbooks have a price of $80 each, while used books cost only $50 each.
a) Draw Penny’s budget constraint, plotting new textbooks on the horizontal axis.
b) Suppose the bookstore offers a special deal for used textbooks. If you buy 5 used textbooks, you get the 6th for free. Draw Penny’s budget constraint now.
c) Now suppose the bookstore has NO special deal on used textbooks. Instead, it announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the price of used books. Upon these news, Penny’s mother offers her $40 extra. Draw Penny’s budget constraint now.
d) Suppose Penny is perfectly indifferent between new textbooks and used textbooks. Her utility function is:
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