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 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 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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