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Consider a consumer who consumes two goods: CDs (good 1) and pizzas (good 2). Her utility function can be represented by u(x,y) = xy. Her income is m=$200. The prices are p1 = $20 and p2= $10.
(a) The utility function v(x,y) = lnx+lny also represents her preferences. Can you explain why? For the rest of the problem, you may pick either u or v as her utility function.
(b) Derive her optimal consumption bundle. Show the calculation, and illustrate your answer graphically please.( indifference curves and the budget constraint).
(c) Now suppose the government levies a 25% tax on each CD the consumer purchases. Derive her new consumption bundle and illustrate it on the same graph as in part a.
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