Skippy has the following utility function:
U(x,y) = xy
Where x is squirrel-kebobs that Skippy eats at Joe's greasy-spoon
and y is a composite commodity. the price of x is Px and the price
of y is set equal to $1. Skippy also has a budget of $100.
- a) Set up Skippy's utility max problem and derive an expression
for Skippy's demand for Squirrel-kebobs.
- b) Use calculus to find Skippy's price elasticity of demand.
- c) If the price of squirrel-kebobs is $3, find Skippy's x*, y*
and Skippy's utility, U*.
- d) Joe offers Skippy a VIP membership for $50, which allows Skippy
to buy squirrel-kebobs at aprice of $1. Will Skippy buy the membership?
- e) What is the most Skippy will pay for a membership?
- f) Instead of lowering the price of squirrel-kebobs, the government
decides to give Skippy enough money so that she is as well
off as being able to buy squirrel-kebobs at $1.