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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