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Business, 03.04.2020 18:05 weeblordd

Consider Trevor who begins his day with strawberry milkshake. To prepare it, he mixes milk, x1, strawberriesx2 and does so always in his favorite: proportion 1 glass of milk to 2 strawberries. Whatis his utilityfunction? Answer all the questions from a) to e) using these preferenes

a) Derive Trevor's demand for milk and strawberries as a function of prices p1, p2 and his income m. (Derive demand using "two secrets of happiness").

b) Fix the price of Strawberries at p2 = 1, and income on m = 10. Find the price offer curve (give an exact formula x2 = f(x1)) and plot it in the commodity space. Find the demand curve x1 = f(p1) and plot it in the graph (with p1 on vertical axis and x1 on horizontal axis).

c) Is x1 an ordinary good or a Giffen good? Explain.

d) Now fix p1 = 1 and p2 = 1. In the commodity space, plot the income offer curve. In addition, in two separate graphs, plot Engel curves for both milk and strawberries. Argue that the two commodities are normal (not inferior).

e) For the demand functions from point a), determine whether the two goods are gross complements, substitutes or neither.

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