Shania consumes music CDs and food. Her utility function is U(F,C) = 50√C+F, where C is the number of CDs and F is pounds of food. Her monthly income is $M, food costs $1 per pound, and CDs cost $10 per CD. Assume that M is large enough such that Shania buys positive amounts of both CDs and food. If the price of CDs rises to $12.50 per CD, how does her best choice of CDs change? Dissect the change in purchases into substitution and income effects. What is the compensating variation for the price change?
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