Question

Suppose Sophie receives utility from bananas and apples. If A = # of apples Sophie consumes and B = # of Bananas she consumes, Sophie's utility function can be described as U (A, B) = ln(A) + 2ln(B). Sophie is also able to purchase fractions of fruit instead of having to buy whole amounts.

a) Income = Y, price of apples = p(a) and price of bananas = p(b). Derive the demand for apples.

b) Say that apples only cost $1 per apple, bananas = $.50, and Sophie has a budget of $24. How many apples and bananas will Sophie consume?

c) If the price of apples increases to $2, what is the hicksian/compensated demand for apples?

Answer 1