In: Economics
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) [15 Points] 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) [10 Points] Draw the Income Offer Curve and Engel Curves (one for each good).
(c) [10 Points] Draw the Price Offer Curve and Demand Curves.
(d) [5 Points] 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?