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This question explores a quasilinear utility function, ?(?, ?) = ? + 3?^1/2 . Assume an...

This question explores a quasilinear utility function, ?(?, ?) = ? + 3?^1/2 . Assume an interior solution for all of the following questions.

a. Derive the demand functions for goods x and y. (10 points)

b. Use your answer to (a) to determine what must be true of the price of x in order to be at an interior solution. (5 points)

c. Graph the corresponding income consumption curve. (5 p

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Answer #1

The following pictures show the optimal solution when the utility function is quasilinear. Then income offer curve is also graphed which shows the locus of all the points where with an increase in income the optimal allocation change, however here good y is independent of income and a certain amount is consumed regardless of income. Hence income offer curve is horizontal indicating that as income increase only consumption of good x increases.

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