Question
Ice cream and cakes are perfect substitutes for a child, and 2 units of ice cream is always worth 3 units of cakes (however many
Ice cream and cakes are perfect substitutes for a child, and 2 units of ice cream is always worth 3 units of cakes (however many ice creams or cakes she might have, she would be willing to give up 2 ice creams to get 3 more cakes to keep the same utility level) .
(a) Write down a utility function u(x,y) that represents the child's preferences, where x is the number of ice creams and y is the number of cakes she has.
(b) If the prices are px= 8 and py =5, and she has $140 to spend on the two goods this summer, what is her optimal bundle?
(c) If the price of ice creams decreases slightly, down to px = 7, what happens to her optimal bundle in this case? Did it change "slightly" compared to (b)?
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