Reference no: EM131181541
Suppose that Sally's preferences over baskets containing food (good x), and clothing (good y), are crepresent 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 effects if the price of food increases from Px1 = $5 per meal, to Px2 = $12.50 per meal?
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