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There are two goods, X and Y, available in arbitrary non-negative quan- tities (so the consumption set is R). Flora has preferences over consumption
There are two goods, X and Y, available in arbitrary non-negative quan- tities (so the consumption set is R). Flora has preferences over consumption bundles that can be represented by a Cobb-Douglas utility function u: R R+, given by u(x, y) = xy where is the quantity of good X (in kilograms) and y is the quantity of good Y (in kilograms). Flora has a busy schedule and is unable to go to the store to purchase the goods herself. Her neighbor kindly offers to go to the store for Flora. However, her neighbor is able to carry at most 5 kilograms of weight. The price of a unit of good X at the store is p Dirhams/kilogram, and the price of a unit of good Y is 1 Dirham/kilogram. How much money would Flora need to give her neighbor so that her neighbor can purchase a consumption bundle that the neighbor is able to carry, and so that Flora can attain a utility of at least 4 utiles? (a) Formulate this problem as an expenditure minimization problem. (b) Illustrate the constraint set of the expenditure minimization problem in an appropriate diagram. (c) Solve the expenditure minimization problem to find the amount of money that Flora would need to give to her neighbor as a function of the price p, and illustrate this function in an appropriate diagram.
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