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Question: question 5 energetic erin consumes a worrisome amount of caffeinated...

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Question 5: Energetic Erin consumes a worrisome amount of caffeinated beverages, particularly soda (S) and coffee (C). A utility function representing her preferences is given by u 4S05Co5 Erins income is 120 and the prices of the two drinks are given by (ps, pc) (4,2) (a) Solve for Erins utility maximizing bundle of beverages and calculate how much utility she obtains from it. (b) Suppose Erin moves to Berkeley where there is a soda tax and, consequently, the price of soda is 6. Solve for Erins new utility maximizing bundle of beverages and calculate how much utility she obtains now. What is the total effect of the price change on Erins consumption of soda? (c) Draw a diagram showing Erins budget constraint before and after the move, and repre- sentative indifference curves of her choices before and after the move (d) The total effect you found in part b can be broken down into a substitution effect and an income effect. What is the sign of: (i) the total effect, i) the substitution effect, and (iii) the income effect? Explain why for (ii) and (ii).
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