Question
Brian eats granola and cereal for his breakfast, and likes granola (G) twice as much as cereal (C), and views them as perfect substitutes. The
Brian eats granola and cereal for his breakfast, and likes granola (G) twice as much as cereal (C), and views them as perfect substitutes. The price of a box of granola is $5, the price of a box of cereal is $3, and Brian hast $15 to spend on breakfast in a week.
1. Write down a utility function which represents Brian's preferences over granola and cereal.
2. Find the Hicksian demand functions for granola and cereal. You will have three cases depending on the relationship between pG and pC. (Hint: The first order conditions will not help; use a graph of the indifference curves and budget set.)
3. Now, suppose that the price of a granola rises to $7. How does the consumption of Brian changes?
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