Margaret spends all of her income on t-shirts (x1) and shoes (x2). Her preferences can be...

Margaret spends all of her income on t-shirts (x1) and shoes (x2). Her preferences can be represented by the utility function u (x1, x2) = 2√x1x2.

(a) Derive the demand functions for t-shirts and shoes in terms of the price of t-shirts (p1), the price of shoes (p2), and income (m). Show your result on a graph.

(b) Draw the Income Offer Curve and Engel Curves (one for each good).

(c) Draw the Price Offer Curve and Demand Curves.

(d) Suppose the price of shoes are $16, the price of a t-shirt is $16, and Margaret has $128 income. What is the optimal bundle of t-shirt and shoes (x1,x2) which gives her the highest utility?

Expert Solution

Rahul Sunny answered 1 year ago

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Margaret spends all of her income on t-shirts (x1) and shoes (x2). Her preferences can be...

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