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Assignment 1 ? Consumer Theory
Suppose that Sally?s preferences over baskets containing
food (good x), and clothing (good
y), are described by the utility function U (x, y) = x + y. Sally?s corresponding marginal
and MUy = 1.
MUx = ?
Use Px to represent the price of food, Py to represent the price of clothing, and I to
represent Sally?s income.
Question 1: Find Sally?s food demand function, and Sally?s clothing demand function.
For the purposes of this question you should assume that I/Py ? Py /4Px . (7 Marks)
Question 2: Describe the relationship between Sally?s demand for food and,
(a) Sally?s income;
(b) the price of food;
(c) the price of clothing.
Your answers should reference the demand function that you derived in question 1, and
correctly apply the relevant terminology. You should continue to assume that I/Py ?
Py /4Px . (6 Marks)
Question 3: Now assume that I/Py < Py /4Px . Find Sally?s food demand function, and
Sally?s clothing demand function. (4 Marks)
Question 4: Suppose that the price of clothing is Py = $50 per item, and that Sally?s
income is I = $425. What are the income and substitution effects if the price of food
increases from Px1 = $5 per meal, to Px2 = $12.50 per meal? (8 Marks)
This question was answered on: Dec 18, 2020
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