1.

Granny lives in the Woods and consumes only bread and fruits. One week she falls ill and has to ask her niece, Red, to buy her weekly food. Red lives in the City, where the price of fruit is $2 per kilogram and the price of bread is also $2 per loaf. Red knows that Granny's utility function is given by UU', b) = h1(f) l 2111(3)) and that Granny has allocated $60 of her income for food each week. How much food should Red buy for Granny? (Granny will reimburse Red for the $60 she spends on food, of course). Denote the optimal quantities by f3, be (numerical answer required, tool). In a diagram measuring the quantity of fruits on the horizontal axis and the quantity of bead on the vertical axis draw: i. Red's budget line. ii. The point (label it C) showing the basket Red purchased in the city. iii. The Indifference cu Ne passing through point C. Heading to Granny's house in the Woods with the food from question 1 in her basket, Red unexpectedly meets the infamous trader B. B. Wolf, which offers to buy or sell food at a price of $6 per kilogram of fruits, and $3 per loaf of bread. Copy the diagram you used to answer question 2, and add to it Red's budget line after meeting Wolf. Should Red trade with Wolf? Note: Red can (ifshe desires so) always afford point C, by simply not trading with Wolf This means her new budget line must pass through point C! After trading with Wolf, how much fruit and bread is in Red's basket? Denote the optimal quantity of food by fw, bw (numerical answer required, too!) Copy the diagram you used to answer question 3, and add to it the point showing the new content of Red's basket. Label that point W. Make sure your diagram shows that point W is an optimal choice