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2. (15 points) Ricardo likes chocolate (1:) and peanut butter (p.51). He always takes one cup of chocolate with two cups of peanut butter (it
2. (15 points) Ricardo likes chocolate (1:) and peanut butter (p.51). He always takes one cup of chocolate with two cups of peanut butter (it is a famin secret recipe for peanut butter chocolate Nanaimo bars). Both chocolate and peanut butter cost $2 per cup. Ricardo has $24 to spend on these two goods. Consider a price drop in peanut butter to $1 per cup. a) What kind of preferences does Ricardo have? Derive his demand functions for chocolate and peanut butter (before the price of peanut butter changes). Show this result graphically. With chocolate measured on the vertical axis. b} Find his optimal consumption bundle before and after the price change and write his budget constraint before and after the price change. c) Using the information 'om b), calculate the income and substitution effects of the price change in peanut butter
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