Question: Suppose Katie’s preferences for goods 1 and 2 are described by the utility function: U = x1+x1x2+x2. Suppose additionally that Katie has a fixed income of 100 and the respective prices of goods 1 and 2 are, 5 and 5.

A) Write Katie’s budget constraint and represent it graphically. What is the maximum quantity of good 1 Katie could purchase if she spent her complete income on good 1. What is the slope of Katie’s budget line?

B) Obtain the marginal utilities for goods 1and 2. . Does the marginal utility of good 1 conform to the law of diminishing marginal utility? Explain. Obtain the MRS of x1 for x2.

C) Obtain the Marshallian demand functions. What is the most preferred market basket? What is the highest level of utility Katie can reach given her incoMeand the prices of both goods?

D) Obtain the cross-price elasticity for good 1. Based on this result, what type of goods are 1 and 2?

E) Obtain the income elasticity for good 2. Based on this result, what type of good is 2?