Montclair ECON 207 – Ronald consumes two goods, X and Y
Refer to Question 3 of Homework 2.Ronald consumes two goods, X and Y. He has a utility function given by the expression: U = 4X0.75Y0.25.So, MUX=3Y0.25/X0.25 and MUY=X0.75/Y0.75.b. Holding Ronald’s income and PY constant at $960 and $48 respectively, find out the equation for Ronald’s demand curve for X. Show your work. (2+8 = 10 points)Refer to the information in Homework 2 Question 4:Ross derives utility from only two goods, chocolates (x) and donuts (y). His utility function is as follows: U(x,y) = 2xy. His marginal utility from chocolates (x) and donuts (y) are given as follows: MUx = 2y and MUy = 2x.Ross has an income of $120 and the price of chocolates (Px) is $0.40 and donuts (Py) is $0.60.b. Suppose price of donuts (Py) increase to $0.80, price of chocolates and income remain unchanged. How much is the total effect of this price change on Ross’s consumption of donuts? Show your work. How much of this total effect is due to income effect and how much is due to substitution effect? Show your work. (2+6+4+4 = 16 points)