suzie purchases two goods, food and clothing. She has the utility function U(x,y)=xy, where x denotes the amount of food consumed and y denotes the amount of clothing. The marginal utilities are MUx=y and MUy=x The price of food is Px, the price of clothing is Py (which you can assume equals $1 per unit) and her income is I.
a) Derive the equation for the demand curve for food. Is food a normal good?
b) Now, suppose that Suzie has an income of $70 per week. Suppose that the price of food is initially Px1=$9 per unit, and that the price subsequently falls to Px2=$4 per unit.Find the numerical values of the income and substitution effects on food consumption. Show the income and substitution effects on a carefully labeled graph.