Reese thinks peanut butter and chocolate are great when separate, but when they combine they are even more epic. In other words, Reese likes to eat either peanut butter or chocolate, but when he eats them together, he gets additional satisfaction from the combination. His preference over peanut butter (x) and chocolate (y) is represented by the utility function: u(x, y) = xy + x + y Suppose that now Reese loses almost his entire income, so that he is left with only one dollar, i.e. his new income is I0 = 1. If prices are still px = 2, py = 4, what is his new optimal consumption of x and y (Hint: Remember
Reese thinks peanut butter and chocolate are great when separate, but when they combine they are even more epic. In other words, Reese likes to eat either peanut butter or chocolate, but when he eats them together, he gets additional satisfaction from the combination. His preference over peanut butter (x) and chocolate (y) is represented by the utility function:
u(x, y) = xy + x + y
Suppose that now Reese loses almost his entire income, so that he is left with only one dollar, i.e. his new income is I0 = 1. If
(a) x∗ = 0.5, y∗ = 0
(b) x∗ = 0.25, y∗ = 0
(c) x∗ = 0.75, y∗ = 0.25
(d) x∗ = 0.75, y∗ = 0
(e) x∗ = 0.5, y∗ = 1
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