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Question: 1. Kate has a preference for tea (T) and shortbread cookies (C) given by the following utility function:
U(T, H) = ln(T) + ln(C)
a) Find Kate's demand for cookies.
b) What is Kate's income elasticity of the demand for cookies?
c) What is Kate's own price elasticity of the demand for cookies? d) And what is Kate's tea price elasticity of demand for cookies (cross-price elasticity of demand)?
e) Calculate the income and substitution effect of a small change in the price of cookies. Also calculate the total effect of a small change in the price of cookies. (Give your answers in terms of income and prices and not utility level.
Hint: Use the Slutsky equation and you can find the substitution effect as a residual after calculating the income effect and the total effect).
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