Question

1) Price and Income changes [***Spoiler Alert***] Cersei Lannister gains utility from two primary goods: blackmail and dead enemies. Her function is given by U = 5xb6xd2, where xb is blackmail and xd is dead enemies. Help Cersei find her optimal consumption pattern. a) Normalize Cersei’s Cobb-Douglas Utility Function, so that the sum of alphas (exponents) is equal 1. b) What is the share of Cersei’s budget spent on blackmail and dead enemies? c) Assuming Y = 1000 silver stags, find Cersei’s “consumption” of blackmail when pb = 1, pb = 5 and pb = 25. Plot the consumption of blackmail for these three price levels on a pb vs. xb graph. d) Assuming pd = 25, find Cersei’s “consumption” of dead enemies when Y = 1000 , Y = 2000 and Y = 3000. Plot the consumption of xd for these 3 income levels on a Y vs. xd graph.

Answer 1

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