Johnson enjoysdrinkingCoke.Heisindifferent between American and Mexican and views them as perfect substitutes.Johnson likes toorderhisCokeonlinefromlocaldistributors in TexasorMexico. He pays in Dollars for American Coke and in Pesos for Mexican Coke.Suppose that a liter of American Coke costs $30, and a liter of Mexican Coke costs 25 pesos (these prices include taxes, shipping and other fees).Since Johnson is indifferent between American coke and Mexican Coke, he treats Dollars and Pesos as perfect substitutes as well.

(a)Assume that Johnson's utility is increasing in the amount of money he can spend on purchasing coke.

Write down Johnson's utility function in terms of quantities of dollars (x) and pesos (y).

(b)Let px and py denote exchange rates for dollars and pesos, respectively.

Let I be the income (in $USA) that Johnson spends quarterly on Coke

WritedownJohnson'sutilitymaximizationproblemandfindMarshallian demand functions for each good.

It means that Johnson has to pay px $USA to spend $1 and py $USA to buy 1 peso.