Grandpa is very particular about his consumption of crackers and cheese. His preferences dictate he must...

 

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Grandpa is very particular about his consumption of crackers and cheese. His preferences dictate he must accompany every cracker with a 10-gram slice of cheese. Having a different ratio of cheese to cracker would be a waste. However, as soon as Grandpa reaches a consumption of five crackers with cheese, his optimal cheese-to-cracker ratio doubles, going up to 20 grams of cheese per cracker. Assume cheese and crackers are perfectly divisible. a. Assume Grandpa has a budget m = $5, the price of each cracker is p = $1, and the price per gram of cheese is p = $0.10. Find the quantities demanded by Grandpa of crackers and cheese. b. Now assume m = $20, p = $1 and p2 = $0.10. Find the quantities demanded by Grandpa of crackers and cheese. c. Now assume m= $20, p = $1 and p = $0.50. Find the quantities demanded by Grandpa of crackers and cheese. d. Draw your answers to a, b and c in one single graph. e. In a different graph, draw Grandpa's income expansion path. Hint: there is a kink. f. Find the demand functions for cheese and crackers in terms of m, p and p. Hint: the demand functions must reflect the kink in the income expansion path. Grandpa is very particular about his consumption of crackers and cheese. His preferences dictate he must accompany every cracker with a 10-gram slice of cheese. Having a different ratio of cheese to cracker would be a waste. However, as soon as Grandpa reaches a consumption of five crackers with cheese, his optimal cheese-to-cracker ratio doubles, going up to 20 grams of cheese per cracker. Assume cheese and crackers are perfectly divisible. a. Assume Grandpa has a budget m = $5, the price of each cracker is p = $1, and the price per gram of cheese is p = $0.10. Find the quantities demanded by Grandpa of crackers and cheese. b. Now assume m = $20, p = $1 and p2 = $0.10. Find the quantities demanded by Grandpa of crackers and cheese. c. Now assume m= $20, p = $1 and p = $0.50. Find the quantities demanded by Grandpa of crackers and cheese. d. Draw your answers to a, b and c in one single graph. e. In a different graph, draw Grandpa's income expansion path. Hint: there is a kink. f. Find the demand functions for cheese and crackers in terms of m, p and p. Hint: the demand functions must reflect the kink in the income expansion path.

Answer rating: 100% (QA)

We can solve this problem by considering Grandpas consumption in two stages Stage 1 Up to 5 crackers ... View the full answer