Question

luel 0 graae your solutions and understand your answers please show your work.The grader will choose randomly two questions and grade only those two questions. Since the choice of questions to be graded is ez-post I do recommend that you solve thoroughly all the questions Problem 1 (25 Points) John has the following utility function that represents his preferences over food (a) and housing (u) (his only two expenses): and marginal utilities: for a level of wealth W and prices of food and housing P.Py respectively. Using the results from the previous homework answer the following questions. 1) Write down the Engel Curve for both goods and graph them. 2) Assume W -10 and the price of food changes from 1 to 3 while the price of housing remains at 3. Decompose the effect of the change in the demand for food in income and substitution effects both graphically and algebraically 3) Find the compensating variation corresponding to the price change form the previous question. Problem 2 (25 Points) Sarah likes to have one cup of coffee and two bagels for breakfast always. Using the results from the previous homework answer the following questions.

Answer 1

I) NOUw dd Junc у":-31 4 Px ピ Slope 3 slo pe

4 X3 413 geise → A)314 314 So f0γ se, New Buice Level So Se- 85 096- 1.404 3) cu-let New inome M' then 4Py

= 13.160 3.601 $ 1ol3 I1 Btoca In cone BC2