Jakob, a Canadian student who just began studying at Bocconi, rapidly

discovers and loves Italian food prepared using the best ingredients available.

In particular, he becomes a huge fan of pici (a traditional Italian home-made

pasta), x1, and Florentine steaks, x2. His utility function over pici and steaks

can be represented as follows:

U(x1, x2) = 1

4

ln x1 +

1

4

ln x2

The prices of a dish of pici and the price of a steak are p1 and p2 (both

expressed in e). Jakob's monthly budget for food amounts to I (in e).

14. According to the cross-price elasticity you just computed, how does the price-consumption curve for pici look like when the price of steaks changes? Draw a properly labeled graph to explain your answer. 15. Define the substitution and income effects deriving from the change in the price of steaks. 16. On a properly labeled graph, show the substitution and income effects using arrows and labels (if helpful) to show the two effects. 17. Derive analytically the substitution elasticity of the compensated (Hick- sian) demand : when the price of steaks, p2, varies. 18. Using the Slutsky equation, decompose the substitution and income effects of this price change