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SectionWS9

# SectionWS9 - Econ 100A Worksheet#9 Demand Functions...

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Econ 100A - Worksheet #9 Demand Functions Exercise 1 Consider the utility function U ( x 1 , x 2 ) = x 1 ( x 2 - 1) . Let p 1 be the price of good 1, p 2 the price of good 2 and I the income. We assume that I > p 2 . 1) Find the equation of the indifference curves and draw a couple with precision. 2) Find the demand functions 3) Solving for I in the demand for good 1 and substituting into the demand for good 2, find the equation of the income-consumption path and plot it on the graph for p 1 = p 2 = 1 . 4) Assume I = 1000 . Find the optimal bundles when p 1 = p 2 = 10 and when p 1 = 5 and p 2 = 10 . 5) Compute the substitution and income effects. 5) Are these goods gross substitutes? Exercise 2 The recipe for the Margarita cocktail specifies the following proportions for one glass: 1 1/2 oz tequila 1/2 oz premium triple sec (preferably Cointreau) 1 oz lime juice Let us ignore the lime juice and focus only on tequila and Cointreau. Let T be the quantity of tequila and C the quantity of Cointreau. Assume that the preferences for cocktails depends only on the number of glasses that can actually be fixed: the
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