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Set up the maximization problem

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Hugo's utility function for food and shelter is defined by F 2 S 3 . The price of food is $1 per unit and the price of shelter is $10 per unit. Hugo's Income is $100. Food and Shelter may be purchased in fractions.

  • Set up the maximization problem and the accompanying Lagrangian.
  • Are Hugo's preferences convex? Justify your answer.
  • How much food and shelter will Hugo consume?
  • Suppose the price of food increases to $1.50. How much food and shelter will Hugo now consume?
  • What is the income effect versus the substitution effect on F from the price change? Depict the two effects on a graph.

Reference no: EM131922515

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