5.1 Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers: 0.75 liter and 2 liter. Because the water itself is identical, he regards these two "goods" as perfect substitutes. a. Assuming Ed's utility depends only on the quantity of water consumed and that the containers themselves yield no utility, express this utility function in terms of quantities of 0.75-liter containers (x) and 2-liter containers (y). b. State Eď's demand function for x in terms of p, Py and I. c. Graph the demand curve for x, holding I and p, constant. d. How do changes in I and p, shift the demand curve for x? e. What would the compensated demand curve for x look like in this situation?
5.1 Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers: 0.75 liter and 2 liter. Because the water itself is identical, he regards these two "goods" as perfect substitutes. a. Assuming Ed's utility depends only on the quantity of water consumed and that the containers themselves yield no utility, express this utility function in terms of quantities of 0.75-liter containers (x) and 2-liter containers (y). b. State Eď's demand function for x in terms of p, Py and I. c. Graph the demand curve for x, holding I and p, constant. d. How do changes in I and p, shift the demand curve for x? e. What would the compensated demand curve for x look like in this situation?
Chapter5: Income And Substitution Effects
Section: Chapter Questions
Problem 5.1P
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Questions a) b) and c)
Transcribed Image Text:5.1
Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers: 0.75 liter and 2 liter. Because
the water itself is identical, he regards these two "goods" as perfect substitutes.
a. Assuming Ed's utility depends only on the quantity of water consumed and that the containers themselves yield no utility,
express this utility function in terms of quantities of 0.75-liter containers (x) and 2-liter containers (y).
b. State Ed's demand function for x in terms of px» Py and I.
c. Graph the demand curve for x, holding I and Py constant.
d. How do changes in I and p, shift the demand curve for x?
e. What would the compensated demand curve for x look like in this situation?
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