Question: Tracy loves her coffee - with each latte she orders she has 2 sugars. Coffee costs $4.00 per cup and sugar sachets are $0.50 each

Tracy loves her coffee - with each latte she orders she has 2 sugars. Coffee costs $4.00 per cup and sugar sachets are $0.50 each (times are tough and cafes are now charging for sugar). Tracy has $30 each week to spend on lattes.

a) What is a utility function that best describes Tracy's utility from consumption of lattes and sugar? Explain. Draw an indifference curve map describing the utility function.

b) What is Tracy's optimal consumption of latte and sugar each week? Explain.

c) If the price of lattes increases to $5 per cup - what happens to Tracy's con- sumption bundle?

d) What is Tracy's price elasticity of demand for coffee for change in the price of coffee?

d) What is Tracy's cross-price elasticity of demand for sugar for change in the price of coffee?

e) Tracy's workplace thinks she's amazing and thus want to compensate her for the extra cost of coffee each week - by how much would they need to increase her wage by (on a weekly basis) to maintain her level of initial utility?

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