Question

John considers milk (x1) and hot chocolate (x2) to be perfect substitutes at a rate of 2 : 1, that is, he always receives the same utility if he has two glasses of milk or one cup of hot chocolate to drink. He spends $12 a day on hot beverage, and milk cost $1 while hot chocolate cost $3 each.

[10 Points] What is the optimal bundle of milk and hot chocolate (x1, x2) which gives him the highest utility?

(b) [10 Points] Draw the Income Offer Curve and Engel Curve for milk.

(c) [10 Points] Draw the Price Offer Curve and Demand Curve for milk.

(d) [10 Points] The price of hot chocolate decreases to $1, and his income and the price of milk dont change. How does consumption change when the price of hamburger changes? What is John's new level of utility? Show your result on a graph.

(e) [5 Points] How much must Daniel's budget decrease to return him to the original utility level?

Answer 1

Date Page X,+ 2X2 hot chocolate (X2) Optmal bundll MRS for Mesa Pilp a) NUIIMU 1/2 MRS NRS AIP Since 2/12 12 M/R ePPer urve Income X2 lfeve TncomR Curr 12

Denand C Paice le Cure P. P Nous MRSE No D t2/12 12
We are supposed to do only four subparts to a question. For solution to other parts please post as a separate question.