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Problem 2 (25pts) Consider Trevor who begins his day with straw berry and milk shake. Toprepare it, he mixes milk, I strawberries 32 and does
Problem 2 (25pts) Consider Trevor who begins his day with straw berry and milk shake. Toprepare it, he mixes milk, I strawberries 32 and does so always in his favorite: proportion 1 glass of milk to 2 strawberries. What is his utility function? Answer all the questions from Problem 1, from a) to ej using these preferencesProblem 1 (25pts) Benjamin spends his time either watching movies (r1) (he uses "on demand" option, cable TV) or listening to songs - MP3 downloaded from the Internet (72) . His preferences are described by U(T1, 12) = In(21) + In(12) a) Derive Benjamin's demand for movies and MP3 files as a function of prices p1, p2 and his income m. (do not use Cobb Douglas formula but rather derive demand using "two secrets of happiness"). b) Fix the price of MP 3 at p2 = 1, and income on m = 10. Find the price offer curve (give an exact formula $2 = f(x1 )) and plot it in the commodity space. Find the demand curve r1 = f(p1) and plot it in the graph (with p, on vertical axis and r, on horizontal axis). c) Is x1 an ordinary good or a Giffen good? Explain. d) Now fix p1 = 1 and p2 = 1. In the commodity space, plot the income offer curve. In addition, in two separate graphs, plot Engel curves for both movies and MP3 files. Argue that the two commodities are normal (not inferior) e) For the demand functions from point a), determine whether the two goods are gross complements, substitutes or neither
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