A consumer consumes only food (x1) and alcohol (x2) and he has a utility function U (X1, X2)= x1^a + x2^a
(a) Derive the ordinary demand functions for him.
(b) Now suppose, a= 1/2 , are these goods gross complement or gross substitute?
For all remaining parts suppose p1= $2 and p2= $3 , m= $90 and a= 1/2
(c) Write down the budget constraint and drive the consumer's optimal consumption bundle.
(d) Now suppose the government collects a tax of $1/unit of alcohol (good 2). What is the new budget constraint and how many of each product he will consume? (assume consumption in partial quantity is possible)
(e) Find the substitution effect, income effect and total effect of this price change for alcohol (good 2)