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Please show how to answer all parts of this endowment economy problem. It is complete, nothing is missing Exercise 10.11 Quadratic Utility Patrick owns a

Please show how to answer all parts of this endowment economy problem. It is complete, nothing is missing

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Exercise 10.11 Quadratic Utility Patrick owns a candy shop. He sells hard and soft candies, but also consumes them. Patrick orders his preferences for hard and soft candies according to the following utility function: U(h, s) = 150h - h2 + 300s - 2s2 Assume that Patrick's customers can purchase any quantity of hard and soft candies. a. Suppose that Patrick is given the opportunity to consume as many pounds of hard candy and as many pounds of soft candy as he desires, regardless of cost. How much candy does Patrick consume? b. Suppose that the price of a pound of hard candy is 4 dollars and the price of a pound of soft candy is 2 dollars. Patrick's bakery produces 60 pounds of hard candy and 100 pounds of soft candy every day. Draw the budget constraint in red ink and label the initial endowment point E. c. What are Patrick's gross demands? What are Patrick's net demands? Label Patrick's chosen (consumption) point O. d. Suppose that before Patrick sells his endowment, the price of a pound of hard candy falls to 2 dollars. Draw the new budget line in blue ink. Does Patrick's demand for hard candy rise or fall? By how much? What happens to his demand for soft candy? e. Compute the substitution effect, the income effect, and the endowment effect. Plot these on your diagram. Be sure to label clearly. f. Suppose, now, that the price of hard candy changes after Patrick sells his endowment, rather than before. What is Patrick's new optimal consumption bundle? What are the income and substitution effects? What is the endowment effect? g. Comment on the importance of the timing of the price change. Does timing matter? Is Patrick better off if the price changes before or after he sells his endowment

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