# Price Theory HW3 answers - Skelton Eco 3301 Homework 3...

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Skelton Eco 3301 Homework 3 Answers 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)Demand for stock tips = I/(4Ps) and demand for bowls = (3I)/4Pb B)5 stock tips, 60 bowls; end points on the budget line are 80 bowls and 20 stock tips. C)5 stock tips, 30 bowls; to draw the demand curve, plot the point P=\$10, Qb=60; the point P=\$20, Qb=30 and then connect the points. D)If you assume the prices for part B, she’ll now buy 3 stock tips and 36 bowls. Now, given the price of \$10 for bowls, she buys fewer bowls; therefore, demand must have decreased. E) Plot the point I=\$480, B=36; the point I=\$800, B=60, then connect the points. 2. False, the opposite is true. For all goods, the substitution effect suggests a decrease in price will lead to an increase in quantity bought (because the good becomes relatively cheaper). For normal goods, the income effect suggests the decrease in price increases purchasing

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Price Theory HW3 answers - Skelton Eco 3301 Homework 3...

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