Question

Question 5: Energetic Erin consumes a worrisome amount of caffeinated beverages, particularly soda (S) and coffee (C). A utility function representing her preferences is given by U 4S05C°5 (a) Solve for Erin's utility maximizing bundle of beverages and calculate how much utility she (b) Suppose Erin moves to Berkeley where there is a soda tax and, consequently, the price Erin's income is 120 and the prices of the two drinks are given by (ps.pc)-(4,2). obtains from it. of soda is 6. Solve for Erin's new utility maximizing bundle of beverages and calculate consumption of soda? (c) Draw a diagram showing Erin's budget constraint before and after the move, and repre- sentative indifference curves of her choices before and after the move. d) The total effect you found in part "b" can be broken down into a "substitution effect" and an "income effect". What is the sign of: (i) the total effect) the substitution effect, and (ii) the income effect? Explain why for (ii and (ii.

Answer 1

a) at utility Max, MRss-h=a MRSs ㄎ utetl u(15,30) = 4.4T5, 0-84-85 Now C-3S thus s'-126 lo, C"=30 Now total«Hear , r= s'-s- 10-15 nal Con c1 A stosting ) Now Se, old uilitt Level, u 84.85 Neuw uno 5 N30 30 131 ↓ 12-25 158pF S-1 3 bice chamge, otate Ato B se