David N. gets $3 per week as an allowance to spend any way he pleases.

Because he likes only peanut butter and jelly sandwiches, he spends the entire amount on peanut butter (at $0.05 per ounce) and jelly (at $0.10 per ounce). Bread is provided free of charge by a concerned neighbor. David is a particular eater and makes his sandwiches with exactly 1 ounce of jell and 2 ounces of peanut butter. He is set in his ways and will never change these proportions. A.) How much peanut butter and jelly will David buy with his $3 allowance in a week? Let x = peanut butter, and y = jelly. U = min{2x,y}, so he consumes in proportion z = 2x = y. That is, for each sandwich, he needs 2x and y The budget constraint is I = .05x +.10y

Substituting 3 = 3 = z = 15

.10(z) +..10(z) .20z y = 15 ounces of jelly

x = 30 ounces of peanut butter;

B.) Suppose the price of jelly were to rise to $.15 an ounce. How much of each commodity would be bought? 3 = .10z +.15(z) 3 = .25z z= 12 z = 24 ounces of peanut butter;

y = 12 ounces of jelly

C.) By how much should Davids allowance be increased to compensate for the rise in the price of jelly in part (b)? For David to return to his original utility level, he needs to consume z = 3 more sandwiches. That requires 3 more ounces of jelly and 6 more ounces of peanut butter, or 6(.05) + 3(.15) = $.75 D.) Graph your results in parts (a) to (c)

40 y -Jelly Servings 30 20 10 0 0 10

Increase in the Price of Jelly Servings Compensating Income U (Z=15) U (Z=12)

20

30

40

50

X - Peanut Butter Servings

E.) In what sense does this problem involve only a single commodity, peanut butter and jelly sandwiches? Graph the demand curve for this single commodity. David consumes z = 2 ounces of peanut butter and 1 ounce of jelly sandwiches Thus, z = I/Pz

Price of PB&J Sandwiches

z = I/Pz

0 0 10 20 30 40 50

Z - PB&J Sandwiches

F.) Discuss the results of this problem in terms of the income and substitution effects involved in the demand for jelly. Notice that in the case of perfect complements, an increase in the price of a good prompts a pure income effect. David is simply unable to avoid the effects of an increase in the price of jelly by consuming more relatively less expensive peanut butter.