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Question: Lena loves apple juice, denoted by A, and Oreo cookies, denoted by O.

18 Aug 2024,12:35 PM

 

Lena loves apple juice, denoted by A, and Oreo cookies, denoted by O. Her utility function is equal to U(1,0)= A'°030. The price of the two goods are equal to Pa = 1 and Po = 2, respectively. Lena has $32 to spend.

a) Find Lena's optimal consumption bundle. If you can remember her demand functions, then you do not need to derive them.

b) Suppose the price of Oreo's increases to $3. Find Lena's new optimal consumption bundle. If you can remember her demand functions, then you do not need to derive them.

c) Decompose the change in Lena's demand for Oreos into the substitution effect and the income effect.

 

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