Suppose Danielle consumes pancakes and waffles. Her utility function can be expressed as U(P,W)=10P^.75 W^.5. Furthermore, suppose the price of pancakes is $4.00 and the price of waffles is $2.50.
–Define Danielle’s marginal rate of substitution for PW and the resulting tangency condition under this price paradigm.
–If Danielle’s income is $200.00 and she only buys waffles and/or pancakes, what is her optimal bundle?
–Suppose Danielle moves from Cincinnati to New York City and the price of waffles increases by $1.50. What is the new optimal bundle? Calculate the new income that would be necessary to make Danielle equally happy in both NYC and Cincinnati.
–Sketch the graph.