Suppose Mr. Macleod likes to consume wine. He has the option to consume two different products, 1 liter of red wine (x) or 1.6 liters of white wine (y). x and y are perfect substitutes. Each liter of wine gives Mr Macleod 1 unit ofutility.
(a) Write down Mr. Macleod utility function.
(b) Consider px = 5, I = 10. Calculate the marshallian demand for y. Draw a graph for this demand (y as function of py). Are the goods gross substitutes?
(c) Consider px = 5, py = 10 and I = 10. Suppose the price of y changes to$3. Calculate the total change in demands. Explain your results.