Question

Can I please have help with parts 4-6? Thank you!

Question 3: Sandwiches (30 points) Anabelle does not like to mix peanut butter and jelly in the same sandwich. However, she will consume them separately; for her, a sandwich with 1 spoon of peanut butter is exactly the same as a sandwich with 2 spoons of jelly. Anabelle has an income of m = 50, and the prices per spoonful of peanut butter and jelly are PPB 5 and pj=1. = 1. Write down Anabelle's utility function over peanut butter (PB) and jelly (J). [2 points] 2. Determine Anabelle’s Marshallian demands PBM and Jm. [4 points] 3. Determine Anabelle's new Marshallian demands PB** and Jm*, when the price of peanut butter falls to ppl = 1. (4 points] 4. What are the (Hicks) SE and IE? Draw a diagram to show your analysis, with peanut butter on the horizontal axis, and jelly on the vertical axis. [6 points] 5. Recall that there are two different types of substitution effects. For example, in Q2 we have used the Hicks SE. Does your answer to the last part change if we use the Slutsky SE? Justify. [4 points] 6. Abid likes his peanut butter and jelly sandwiches with exactly 2 spoons of peanut butter and 1 spoon of jelly. He also has an income of m= - 50, and faces prices per spoonful of ppl = 5 and pj = 1. Repeat parts (1)-(5) for Abid's preferences. [10 points, graded for completion]

Answer 1

(4) substitution effect is when the price of a commodity falls it becomes relatively cheaper then it's substitute. So the consumer maximizes his utility by substituting first product for the second one.

In the substitution effect by professor Hicks, the price changes accompanied by a change in the money income that the consumer is neither better of no worse off than before, that is he is brought to the original level of satisfaction.

Income effect is is when the price of of the commodity falls , this will increase the purchasing power (real income ) of the consumer as he will be able to purchase more quantity of the commodity with the same money income.

( Both of these income effect and substitution effect are the main reasons why the negatively sloped demand curve is drawn....)

К. n jelly Duz gh IC Dyr 02. Ф2 Peo Audi

(5) if the income is altered such that the new budget line is drawn passing through the old consumption but with the slope determined by the new prices and consumers optimal choice is on this budget line , the resulting change in the consumption can be called as slutky's substitution effect.

Y Slulky's Approach 8 ME felly Qu Reanut Butter