John spends $I on bottled water which he can buy in two sizes: 0.75 liter and 2 liter. The water is identical in the two sizes and John gets no utility from the containers themselves, only from the water.
(a) Write down a utility function for John in terms of the number of small containers (x) and the large containers (y) that he consumes.
(b) Find John’s demand function for y.
(c) Find John’s compensated demand function for y.
(d) Suppose initially I=20, px=1 and py=2. Draw John’s ordinary and compensated demand curves for y in the same diagram. Make sure to label all the relevant points.