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Find sallys optimal consumption basket

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Reference no: EM131612640

Assignment Questions

Suppose that Sally's preferences over baskets containing coffee (good x ), and milk (good y ), are described by the utility function U(x, y ) = 40√x +y . Sally's corresponding marginal utilities are,

MUx = 20/√x and MUy = 1.
The price of coffee is Px = $4 per cup, and the price of milk is Py = $1 per litre. Sally's income is I = $200.

Question 1: Without deriving the optimal consumption basket, show that the basket with x = 25 cups of coffee, and y = 50 litres of milk, is NOT optimal.

Question 2: Derive the expression for Sally's marginal rate of substitution.

Question 3: Find Sally's optimal consumption basket.

Question 4: Find Sally's new optimal consumption basket if the price of coffee increases to Px = $5 per cup.

Question 5: Is coffee a Giffen good for Sally? Briefly explain. Your answer must reference the consumption baskets you found in questions 3 and 4.

Question 6: Find the income and substitution effects associated with an increase in the price of coffee from $4 to $5 a cup.

Question 7: Describe the relationship between Sally's demand for coffee and her income. Your answers must reference the your previous answers, AND use the correct term to describe the relationship.

Reference no: EM131612640

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len1612640

8/24/2017 7:32:20 AM

Please proceed to help us come up with the solutions, I need the answers by midnight. Are you able to quote me on the best price possible? Describe the relationship between Sally's demand for coffee and her income. Your answers must reference the your previous answers, AND use the correct term to describe the relationship.

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