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Deirdre purchase two goods, food and clothing Economics Answer

Deirdre purchase two goods, food and clothing Economics Answer

1. Deirdre purchase two goods, food and clothing. She has the utility function of U(x, y) = xy, where x denotes the amount of food consumed and y the amount of clothing. MUx = y and MUy = x.
a) Show that the equation for her demand curve for clothing is y = I/2Py
b) Is clothing a normal good? Explain.

2. Derrick purchases two goods, food and clothing. He has a diminishing marginal rate of substitution of food for clothing. Let x denote the amount of food consumed and y the amount of clothing. Suppose the price of food increase from Px1 to Px2. On a clearly labeled graph, illustrate the income and substitution effects of the price change on the consumption of food. Do so for each of the following cases:

a) Case 1: Food is a normal good.
b) Case 2: Food is an inferior good, but not a Giffen good.
c) Case 3: Food is a Giffen good.

3. Ephraim’s preferences over pizza (x) and other goods (y) are given byU(x, y) = xy, with MUx = y and MUy = x. His income is \$120.
a) Calculate his optimal basket when Px = \$4 and Py = \$1.
b) Calculate the income and substitution effects of a decrease in the price of pizza to \$3. Illustrate the income and substitution effects on a graph.

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