Question: Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers - .75 liter and 2 liter. Because the water

Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers - .75 liter and 2 liter. Because the water itself is identical, he regards these two "goods" as perfect substitutes.

a. Assuming Ed's utility depends only on the quantity of water consumed and that the containers themselves yield no utility, express this utility function in terms of quantities of .75L containers (X) and 2L containers (Y).

b. State Ed's demand function for X in terms of PX, PY and I.

c. Graph the demand curve for X, holding I and PY constant. Let I = 10, and Py =2. Observe that when Px = .75, demand for X falls to zero.

d. How do changes in I and PY shift the demand curve for X?

e. What would the compensated demand curve for X look like in this situation?

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