Question 2: (15 Marks) Consider Bob who only consumes donuts and coffee in fixed proportions. Bob consumes 2 donuts with each cup of coffee.

a) Write down a utility function for Bob and sketch at least 2 indifference curves for him. (4 Marks)

b) If a donut cost $0.50 and a cup of coffee costs $2 and Bob has an income of $90, what is his optimal bundle of cups of coffee and donuts? (5 Marks)

c) Suppose the price of coffee now increases to $8, what is his new bundle? (2 Marks)

d) Sketch the demand curve for coffee. (1 Mark) e) Decompose on a graph, the price increase of coffee into the income and substitution effect. (You need to write the magnitude of both the effects) (3 Marks)