Task Panapz

3

a. Formulate the budget condition for Petter, and show this graphically in a good

diagram.

b. In order to choose how much Petter will buy of the two goods, he assumes that

he will maximize utility. What is meant by utility? Also explain what a utility

function shows.

c.

Give an account of Petter's optimal adaptation to the goods market.

d. Suppose the price of rolls (p1) goes down. Show and explain how this affects

Petter's demand for the two goods.

e. Take as a starting point that the drop in the price of rolls has led to increased

demand for rolls. Show and explain how this change in demand can be

decomposed into a substitution effect and an income effect.

f. Now suppose that the utility function is given by:

U=10X 1 X 2,

and that the prices are p 1= 5, and p 2= NOK 10. How much does Petter buy of