Question

Question : Katherine is only made happy by eating portions of ice cream containing exactly four parts chocolate to three parts vanilla. She simply will not eat anything else and will not eat ice-cream in any other ratio.

a) Write down a utility function for Katherine and sketch at least 2 indifference curves for her.

b) If the price of chocolate ice cream is $3 per pint and price of vanilla is $2 per pint, what is Katherine’s utility-maximizing consumption of chocolate ice-cream when her income is $9?

c) Suppose the price of chocolate ice cream now increases to $7.5, what is her new bundle?

d) Sketch the demand curve for ice cream.

e) Decompose on a graph, the price increase of ice cream into the income and substitution effect. (You need to write the magnitude of both the effects)

Answer 1