Price Theory HW3

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

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

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