f the consumer has Cobb-Douglas preferences, it ispossible for one of the goods to be a Giffen good.c. If a consumer has quasilinear preferences over twogoods, then her consumption of neither gooddepends on her level of income. 2. (15 points) Consider the utility function u(x; y) = 2 ln x +ln y. Initially, the prices are px = $2/unit and py =$1/unit. The consumer has an income of $18. Illustrateyour answers with graphs.a. (3 points) Deriveconsumption bundle the consumer’s optimal
b. (2 points) Now suppose the price of good xincreases to pâ€™x = $3/unit. What is the new optimalconsumption bundle? c. (5 points) Calculate the substitution effect and theincome effect. Illustrate it on a graph.d. (5 points) Calculate the compensating variation andequivalent variation of the price change.
3. (10 points) Angela always takes one cup of cookies withone cup of coffee. Cookies cost $2 per cup, and coffeecosts $1 per cup. Angela has $12 to spend on cookiesand coffee. Consider a price drop in cookies to $1 percup.a. (4 points) Illustrate Angelaâ€™s optimal consumptionbundles before and after the price change with agraph. Explain your reasoning.b. (6 points) Decompose the change in Angela’sconsumption of cookies into the income effect andthe substitution effect. Illustrate them in the graph.
4. (8 points) A consumer’s demand for kitsch is x(p) = 100 – p.a. (4 points) At price p = 40, what is the total bene tshe derives from consuming kitsch? What is herconsumer’s surplus? b. (4 points) Suppose now the price rises to pâ€™= 50,what is the change in her consumer’s surplus? Whatpart of the change is due to increased cost ofbuying kitsch, and what part of the change is due tothe reduced consumption of kitsch? 5. (6 points) Calculate the price elasticities for thefollowing demand functions at the given prices.a. (3 points) D(p) = 100-p at p = 20.b. (3 points) D(p) = 100p (100 over p) at p = 10
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