- Hugo’s utility function for food and shelter is defined by F 2 S 3 . The price of food is $1 per unit and the price of shelter is $10 per unit. Hugo’s Income is $100. Food and Shelter may be purchased in fractions.
- Set up the maximization problem and the accompanying Lagrangian. (5pts)
- Are Hugo’s preferences convex? Justify your answer. (10pts)
- How much food and shelter will Hugo consume? (5pts)
- Suppose the price of food increases to $1.50. How much food and shelter will Hugo now con-
- sume? (5pts)
- What is the income effect versus the substitution effect on F from the price change? Depict the
- two effects on a graph. (15pts)
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