Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Thanks for the help Leo loves drinking wine. He is indifferent between red and white and views them as perfect substitutes. Leo likes to order

Thanks for the help

image text in transcribed
Leo loves drinking wine. He is indifferent between red and white and views them as perfect substitutes. Leo likes to order his wine online from local distilleries in Ireland or Scotland. He pays in Euro for Irish and in GBP for Scotch. Suppose that a liter of Irish costs 30 euros , and a liter of Scotch costs 25 GBP(these prices include taxes, shipping and other fees). Since Leo is indifferent between Irish and Scotch, he treats Euro and GBP as perfect substitutes as well. (a) Assume that Leo's utility is increasing in the amount of money he can spend on purchasing wine. Write down Leo's utility function in terms of quantities of Euro (x) and GBP (y). (b) Let px and py, denote exchange rates for Euro and GBP, respectively . Let I be the income (in SUSA) that Leo spends quarterly on wine. Write down Leo's utility maximization problem and find Marshallian demand functions for each good. 1 (It means that Leo has to pay pxSUSA to buy el and pySUSA to buy fl. 2) (c) Let the exchange rate for GBP be py = $1.40. Let Leo allocate I = $140 per month to purchase currency. Plot Leo's demand function for Euro as a function of px. (d) Suppose, the current exchange rate for Euro is px = 1.20. What is Leo's demand for each currency? What utility level will he get? How much wine will Leo consume? (e) Suppose the exchange rate for GBP becomes ply = $1.45, and the exchange rate for Euro remains as before px = $1.20. What is Leo's demand for each currency? What are the income and substitution effects of this price change? (f) Suppose the exchange rate for GBP remains pay = $1.45, and the exchange rate for Euro drops to p'x = $1.167. What is Leo's demand for each good? What are the income and substitution effects of this price change

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Local Disaster Resilience Administrative And Political Perspectives

Authors: Ellen Russell, Ashley D Ross

1st Edition

1135910618, 9781135910617

More Books

Students also viewed these Economics questions

Question

=+a) Student ratings of an instructor on a 5 point Likert scale.

Answered: 1 week ago

Question

What is a process and process table?

Answered: 1 week ago

Question

What is Industrial Economics and Theory of Firm?

Answered: 1 week ago

Question

What is the meaning and definition of E-Business?

Answered: 1 week ago

Question

2. Find five metaphors for communication.

Answered: 1 week ago