Question
Clarisse, a self-confessed sweet tooth, regularly consumes chocolates and doughnuts. Her utility function is U(x C ,x D )= x C x D where xC
Clarisse, a self-confessed sweet tooth, regularly consumes chocolates and doughnuts. Her utility function is U(xC,xD)= xCxD where xC and xD denotes quantity for chocolates and doughnuts, respectively. The unit price per chocolate is R15 and per doughnut is R10, while Clarisse's income allocation is R60 a day. The price per doughnut suddenly falls to R6.
Question:
1.1 Derive Clarisse's demand functions for chocolates and doughnuts. [5]
1.2 Derive, with supporting mathematical techniques, the Slutsky income effect and substitution effect of the price change from the demand functions derived in 1.1. [7]
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