代写 Price Theory Assignment 1 – Consumer Theory

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代写 Price Theory Assignment 1 – Consumer Theory

Price Theory

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,

MU x =

1

2 √ x

and MU y = 1.

Use P x to represent the price of food, P y 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/P y ≥ P y /4P x . (7 Marks)

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.

代写 Price Theory Assignment 1 – Consumer Theory

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/P y ≥

P y /4P x . (6 Marks)

Question 3: Now assume that I/P y < P y /4P x . Find Sally’s food demand function, and

Sally’s clothing demand function. (4 Marks)

Question 4: Suppose that the price of clothing is P y = $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 P x1 = $5 per meal, to P x2 = $12.50 per meal? (8 Marks)

1

代写 Price Theory Assignment 1 – Consumer Theory