In the basic setting, all of them demand the same since all have the same utility function, prices are the same and income is the same. Just calculate the demand. If prices increase, then income will be different and then the demand will be different.

The only thing that separates the three individuals in Question 3 is that they have different levels of income. One has money income and two of them have different endowments. The idea here is that they can always sell the endowments at the market price. So if prices are 2 for both products, then the income of Bertha is 120. After the price change however the income of Bertha changes, too. So the income effect will be different for Bertha and Chen to the income effect of Ann. Since all have the same utility function, the substitution effect will be the same for all

3. [30pts] Endowments and Sfutsky equation Assume the preferences of Ann, Bertha and Chen can he represented by the same utility 2 3 function Man, 32) = 3:131:25. Prices are p; = 2 and 312 = 2. Ann is initially endowed with monetary income or = 120, Bertha is endowed with 50 units of good 1 and 10 units of good 2 {and no money) and Chen has 10 units of good 1 and 50 units of good 2 [no money]. Bertha and Chen can buy and sell their endowments at prices 19; and 192. (a) What is the initial demand {i.e. gross demand, after computing endowments into income) of Ann, Bertha, and Chen for both goods? (h) Now suppose the price of good 1 increases from 2 to 3. For each of the three consumers, compute the total effect of the price change on good 1, the substitution effect and the income effect, respectively. (c) How can you explain the sign of the income effect for each of the three consumers? Discuss differences in the total effect between the consumers