Question

1. Susie is walking through the Sahara Desert late one Thursday night, when she happens upon a Mexican cantina that is serving margaritas (M) and tacos (T). I know, who would've thought? She has $30 in her pocket, no other income, and is quite hungry and thirsty. Margaritas are $2 each and tacos cost $2. Her utility is given by the equation: U=MT

a. To maximize her happiness, how many margaritas and tacos should she order?

b. Derive Susie's demand for tacos. The clock strikes midnight, and it becomes Taco Tuesday (yes, on Friday!), and tacos drop to $0.25 each.

c. How many tacos does Susie now order?

d. How many more or less tacos does Susie order due to the substitution effect? Due to the income effect?

e. On one graph (M&T; T on the x-axis), illustrate Susie's utility and budgets from parts a d. On another, graph Susie's demand for tacos, labeling at least two points.

Answer 1

Answer:

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