1. (18 points) In a two-commodity world, suppose that Winnie’s preference can be characterized by the utility function, UW(X, Y) = ln X + lnY + 2018,…
September 3, 2020
If I owned a sub shop in a college town. I primarily would serve tow groups of people: both students and other local residents and vistors that visit….
September 3, 2020

4. (24 points) Consider a quasi-linear utility function, U(X, Y) = X^(1/2) + Y, with P_x and P_y being the price of X and Y respectively.

a. (6 pts) Find the demand functions for X* and Y* for both the interior and the corner solutions.

b. (4 pts) Ceteris paribus, how does X* change when the price of X increases? When income Increases? Show your work.

c. (6 pts) Now, let P_y = $1, I = 24, and Px increases from $0.5 to $2. Decompose the effect of this price increase into the substitution effect and the income effect, and calculate their magnitude.

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