nds all of her income M on soda and chips. The price of soda is 2 per unit. Irene’s utility function is U (s, c) = 5 ln(1 + s) + ln(1 + c). Hint: throughout the question, you can assume M ≥ 50 and pc ≤ 8 (these assumptions just rule out the possibility of corner solutions, but do not affect the way we solve the problem). (a) Derive Irene’s demand function for chips (as a function of her income and the price of chips). (b) Are chips an inferior good for Irene? Is the magnitude of the (total) effect of a decrease in price of chips greater or smaller than the corresponding substitution effect. (c) Obtain Irene’s inverse demand function fo
Irene spends all of her income M on soda and chips. The
U (s, c) = 5 ln(1 + s) + ln(1 + c).
Hint: throughout the question, you can assume M ≥ 50 and pc ≤ 8 (these assumptions just rule
out the possibility of corner solutions, but do not affect the way we solve the problem).
(a) Derive Irene’s
(b) Are chips an inferior good for Irene? Is the magnitude of the (total) effect of a decrease in price of chips greater or smaller than the corresponding substitution effect.
(c) Obtain Irene’s inverse demand function for chips when her income is M = 50. Show that this function is decreasing and convex. is irenes engel curve upward or downward sloping? explain
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