Michael does not like to mix peanut butter and jelly in the same sandwich. However, he will consume them separately; for him, a sandwich with 1 spoon of peanut butter is exactly the same as a sandwich with 2 spoons of jelly. Michael has an income of m = 50, and the prices per spoonful of peanut butter and jelly are pPB=5 and pJ=1 1. Please write down Michael’s utility function over peanut butter (PB) and jelly (J). 2. Please determine Michael’s Marshallian demands PB*m and J*m 3. Please determine Michael’s new Marshallian demands PB*m and J*m, when the price of peanut butter falls to pPB = 1.
Michael does not like to mix peanut butter and jelly in the same sandwich. However, he will consume them separately; for him, a sandwich with 1 spoon of peanut butter is exactly the same as a sandwich with 2 spoons of jelly. Michael has an income of m = 50, and the prices per spoonful of peanut butter and jelly are pPB=5 and pJ=1
1. Please write down Michael’s utility function over peanut butter (PB) and jelly (J).
2. Please determine Michael’s Marshallian demands PB*m and J*m
3. Please determine Michael’s new Marshallian demands PB*m and J*m, when the price of peanut butter falls to pPB = 1.
4. What are the (Hicks) SE and IE? Draw a diagram to show your analysis, with peanut butter on the
horizontal axis, and jelly on the vertical axis.
5. Recall that there are two different types of substitution effects. For example, in Q2 we have used the
Hicks SE. Does your answer to the last part change if we use the Slutsky SE? Justify.
6. Nam likes his peanut butter and jelly sandwiches with exactly 2 spoons of peanut butter and 1 spoon
of jelly. He also has an income of m = 50, and faces prices per spoonful of pPB = 5 and pJ = 1.
Repeat parts (1)-(5) for Nam’s preferences.
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