USE ALICE AS BOB

A) Find Bob's demands for each good, with y = 60, p1 = 6, p2 = 2. Call his demands (x1, x2). Draw a diagram showing the budget line and the indifference curve through his choice.

2) Suppose p1 is decreased to p1 = 4, with y and p2 unchanged. Find the new demands, and draw a new diagram.

C) Find Bob's choice given this budget line, and call it (z1, z2). State the substitution effect for each good

D) After the substitution effect alone, find Alice's new utility E) Now find the income effect on each good.

3. Answer the same series of questions (ae) as in the previous problem, but for Bob, whose preferences are quasi-linear, given by 'LLB(L'1,.T2) I {131 + lnill2 You should start by calculating a general formula for Bob's demands (331, $2) in terms of 3;, p1 and p2. Proceed on the assumption that you have an interior solution, which must satisfy the tangency condition. Your formulas will be valid for all the prices and incomes used on this assignment. For other values, the formulas could give negative answers, which would indicate that the true choice is a corner solution. U Her income is y = 60 and prices are p1 = 6,122 = 2. The point of this exercise is to calculate the substitution and income effects of a change in prices on Alice's demands. You can review Notes 8 to help interpret these calculations. (a) Find Alice's demands for each good, with y : 60, p1 : 6, p2 : 2. Call her demands (3:1, x2). Draw a diagram showing the budget line and the indifference curve through her choice. (b) Suppose p1 is decreased to p1 = 4, with y and p2 unchanged. Find the new demands, and draw a new diagram. Call the new demands (wl, wg)