David gets $3 per month as an allowance to spend any way he pleases. Since he likes only peanut butter and jelly sandwiches, he spends the entire amount on peanut butter (at $0:05 per ounce) and jelly (at $0:1 per ounce). Bread is provided free of charge by a concerned neighbor. David is a picky eater and makes his sandwiches with exactly 1 ounce of jelly and 2 ounces of peanut butter. He is set in his ways and will never change these proportions.
a) How much peanut and jelly will David buy with his $3 allowance per week?
b) Suppose the price of jelly increases to $0:15 per ounce. How much of each commodity would be bought?
c) By how much should David?s allowance be increased to compensate for the rise in the price of jelly in part b?
d) Graph your results of part a through part c.
e) In what sense does this problem involve only a single commodity? Graph the demand curve for this single commodity.
f) Discuss the results of this problem in terms of the income and substitution e¤ects involved in the demand for jelly.