Reference no: EM131177651
Assignment 1: Consumer Theory
Suppose that Sally's preferences over baskets containing food (good x), and clothing (good y), are described by the utility function U(x, y) = √x + y. Sally's corresponding marginal utilities are,
MUx = 1 / 2√x and MUy = 1.
Use Px to represent the price of food, Py to represent the price of clothing, and I to represent Sally's income.
Question 1: Find Sally's food demand function, and Sally's clothing demand function. For the purposes of this question you should assume that I / Py ≥ Py / 4Px.
Question 2: Describe the relationship between Sally's demand for food and,
(a) Sally's income;
(b) the price of food;
(c) the price of clothing.
Your answers should reference the demand function that you derived in question 1, and correctly apply the relevant terminology. You should continue to assume that I / Py ≥ Py / 4Px.
Question 3: Now assume that I / Py ≥ Py / 4Px. Find Sally's food demand function, and Sally's clothing demand function.
Question 4: Suppose that the price of clothing is Py = $50 per item, and that Sally's income is I = $425. What are the income and substitution e ects if the price of food increases from Px1 = $5 per meal, to Px2 = $12:50 per meal?