Home » Sebastian insists that for every pancake that he eats he must also have 4 banana slices. The price of pancakes is \$5 per piece and the price of…

Sebastian insists that for every pancake that he eats he must also have 4 banana slices. The price of pancakes is \$5 per piece and the price of…

Sebastian insists that for every pancake that he eats he must also have 4 banana slices. The price of

pancakes is \$5 per piece and the price of banana slices are \$.50 per slice. Sebastian’s income is \$16.

a. Set up the maximization problem. (3pts)

b. Draw the graph that depicts the problem. Be sure to label every aspect of your graph. (5pts)

c. Define Sebastian’s ordinary and inverse demand for banana slices and pancakes in terms of the

price of banana slices (PB), price of pancakes (PP) and income (m). (4pts)

d. How many of each good will Sebastian consume? He CANNOT consume fractions of either good

and he spends his entire income. (8pts)

e. Suppose that the price of bananas decreases to \$.25 per slice while the price of pancakes

increases to \$6.00 per piece. How many pancakes and bananas will Sebastian now consume?

(6pts)

f. What is the income effect (IE) versus the substitution effect (SE) on pancakes from the

combined price changes? (8pts)

g. Depict the two effects of a graph. (6pts)

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