| Paul consumes only two goods, pizza (P) and hamburgers (H) and considers them to be perfect substitutes, as shown by his utility function: U(P, H) = P + 4H. The price of pizza is $3 and the price of hamburgers is $6, and Paul’s monthly income is $300. Knowing that he likes pizza, Paul’s grandmother gives him a birthday gift certificate of $60 redeemable only at Pizza Hut. Though Paul is happy to get this gift, his grandmother did not realize that she could have made him exactly as happy by spending far less than she did. How much would she have needed to give him in cash to make him just as well off as with the gift certificate? |
