Price Theory HW3

# Price Theory HW3 - Skelton Eco 3301 Homework 3 1 The...

This preview shows pages 1–2. Sign up to view the full content.

Skelton Eco 3301 Homework 3 1. The utility Martha Stewart derives from her purchase of bowls and stock tips is represented by the equation U(b,s) = b 0.75 s 0.25 , so that MU b = 0.75*b -0.25 s 0.25 and MU s = 0.25*s -0.75 b 0.75 . A) What equation describes Martha’s demand for stock tips? This should state her demand for stock tips as a function of the price of stock tips for any possible income level. Similarly, determine the equation for her demand for bowls. (6 pts) B)Suppose Martha earns income of \$800, the price of bowls is \$10, and the price of stock tips is \$40. What combination of bowls and stock tips maximizes her utility? Show this using a budget line and indifference curves. (5 pts) C)Suppose the price of bowls rises to \$20; what is the new utility maximum combination of goods? Draw the graph of Martha’s demand curve. (3 pts) D)Show that a decrease in income to \$480 (perhaps resulting from a jail term) will shift Martha’s demand curve. (3 pts) E) Use your calculation from part D to construct an Engel curve for Martha. (2 pts)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/02/2008 for the course ECON 3301 taught by Professor Skelton during the Spring '08 term at SMU.

### Page1 / 2

Price Theory HW3 - Skelton Eco 3301 Homework 3 1 The...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online