1. Paul's preferences over present and future consumption are as follows: uT (c0, c1) = 1/2 ln c0 + 1/2 ln c1 Suppose that Tundes endowments for each period are M0 = 30 and M1 = 55, and the interest rate is 10%

-Derive Tundes intertemporal demand functions for goods c0 and c1 for all 1 > 0 and write them as a vector

Q2. Every month Diaz visits her favorite Mexican restaurant, Los Charros, and orders tacos and burritos from their menu. Her preferences are represented by the following utility function: uD (t, b) = 3/4 ln t + 1/4 ln b where t = number of tacos and b = number of orders of burritos. Suppose that on Monday each taco costs $4 and each order of burritos $5. On Taco Tuesdays, the price of tacos is Pt = $2. Suppose also that every month, Diaz sets aside $800 to spend in Mexican food

(a) Find the income and substitution effects on Diaz consumption graphically. Plot these showing the hypothetical budget line, compensated bundle x and each indifference curve. (b) Plot CS in a figure showing inverse demand for good 1(tacos) 1 t(p,m) and Hicksian demand functions hd(p,c). (c) Write a mathematical expression to represent the value of CS given the price changes (hint: use an integral). What can you say about Diaz welfare with the price changes? (d) Given your results above, which goods appear to be normal? Explain

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