Catrina buys two goods, food F and clothing C, with the utility function U = FC +
Question:
Catrina buys two goods, food F and clothing C, with the utility function U = FC + F. Her marginal utility of food is MUF = C + 1 and her marginal utility of 213 clothing is MUC = F. She has an income of 20. The price of clothing is 4.
a) Derive the equation representing Catrina’s demand for food, and draw this demand curve for prices of food ranging between 1 and 6.
b) Calculate the income and substitution effects on Catrina’s consumption of food when the price of food rises from 1 to 4, and draw a graph illustrating these effects. Your graph need not be exactly to scale, but it should be consistent with the data.
c) Determine the numerical size of the compensating variation (in monetary terms) associated with the increase in the price of food from 1 to 4.
Step by Step Answer:
Solution a MUF C 1 b MUF increases from 0 to 1 where...View the full answer
