Question: Budget constraint: P 1 c 1 + P 2 (1+ )c 2 = Y Optimality condition: P 1 /P 2 (1+ ) = (c 1

Budget constraint: P₁c₁ + P₂(1+ )c₂ = Y

Optimality condition: P₁/P₂(1+ ) = (c₁/c₂)^-1/p

a) Solve for the household's consumption demand functions for c1^* and c2^*.

b) Using your answers from part (d), perform comparative static analysis to mathematically show how an increase in the transaction cost causes the optimal values of c1* and c2^* to change.

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