Econ 100A - Worksheet #9Demand FunctionsExercise 1Consider the utility functionU(x1, x2) =x1(x2-1).Letp1be the price of good 1,p2the price of good 2 andIthe income. We assume thatI > p2.1)Find the equation of the indifference curves and draw a couple with precision.2)Find the demand functions3)Solving forIin the demand for good 1 and substituting into the demand for good 2, find the equation of the income-consumptionpath and plot it on the graph forp1=p2= 1.4)AssumeI= 1000. Find the optimal bundles whenp1=p2= 10and whenp1= 5andp2= 10.5)Compute the substitution and income effects.5)Are these goods gross substitutes?Exercise 2The 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 juiceLet us ignore the lime juice and focus only on tequila and Cointreau. LetTbe the quantity of tequila andCthe quantityof Cointreau. Assume that the preferences for cocktails depends only on the number of glasses that can actually be fixed: the
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