Question 1: Suppose that Samantha has Cobb-Douglas preferences over tomatoes (good 1) and potatoes (good 2) U(q1, q2) 1/2 1/2 91' 92 (1) Calculate Samantha's optimal choice (qi, q5) if pi = 2, p2 = 2 and Y = 64. (2) Calculate Samantha's optimal choice (q*, q**) if the price of tomatoes in- creases to Pi = 8. (3) On a clearly labeled graph: plot both budget constraints, both of Samantha's optimal choices, and sketch indifference curves through each optimal choice. Then, sketch how the total effect of the price change can be broken into the substitution effect and the income effect.

Question 1: Suppose that Samantha has Cobb-Douglas preferences over tomatoes (good 1) and potatoes (good 2) U(q1, q2) 1/2 1/2 91' 92 (1) Calculate Samantha's optimal choice (qi, q5) if pi = 2, p2 = 2 and Y = 64. (2) Calculate Samantha's optimal choice (q*, q**) if the price of tomatoes in- creases to Pi = 8. (3) On a clearly labeled graph: plot both budget constraints, both of Samantha's optimal choices, and sketch indifference curves through each optimal choice. Then, sketch how the total effect of the price change can be broken into the substitution effect and the income effect.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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