Bob enjoys drinking whiskey. He is indifferent between Irish and Scotch and views them as perfect substitutes. Bob likes to order his whiskey online from local distilleries in Ireland or Scotland. He pays in Euro for Irish and in GBP for Scotch. Suppose that a liter of Irish costs 30, and a liter of Scotch costs 25 (these prices include taxes, shipping and other fees). Since Bob is indifferent between Irish and Scotch, he treats Euro and GBP as perfect substitutes as well.

(a) Assume that Bob's utility is increasing in the amount of money he can spend on purchasing whiskey. Write down Bob's utility function in terms of quantities of Euro (x) and GBP (y).

(b) Let Px and Py denote exchange rates for Euro and GBP, respectively. Let I be the income (in $USA) that Bob spends quarterly on whiskey. Write down Bob's utility maximization problem and find Marshallian demand functions for each good.

(c) Let the exchange rate for GBP be Py= $1.40. Let Bob allocate I= $140per month to purchase currency. Plot Bob's demand function for Euro as a function of Px.

(d) Suppose, the current exchange rate for Euro is Px= 1.20. What is Bob's demand for each currency? What utility level will he get? How much whiskey will Bob consume?

(e) Suppose the exchange rate for GBP becomes P'y= $1.45, and the ex-change rate for Euro remains as before Px= $1.20. What is Bob's demand for each currency? What are the income and substitution effects of this price change?

(f) Suppose the exchange rate for GBP remains P'y = $1.45, and the ex-change rate for Euro drops to P'x= $1.167. What is Bob's demand foreach good? What are the income and substitution effects of this price change?