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Question

Carina buys two goods, food F and clothing C, with the utility function: u(F,C)= FC

2F + C

a) Write

down an equation for indifference curve. Verify whether ICs are (i) downward sloping, (ii) have diminishing MRS.

b) Carina has an income of I. Denote price of food by pF and price of clothing by pC and derive Carina's demand for food and demand for clothing.

c) Is clothing a normal or an inferior good? If normal, can you characterize it as a necessity or as a luxury good? If inferior, is it an ordinary or Giffen good?

d) Suppose that initially pF = pC = 4 and I = 48. Calculate the change in consumption of food due to income and substitution effects when the price of food falls from 4 to 1, and draw a graph illustrating these effects. Explain the sign of these changes.

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