Fred has a Cobb-Douglas utility function with exponents that sum to 1.Sally consumes the same two goods, but the two goods are perfect substitutes for her.Despite these differences, Fred and Sally have the same price offer curves.

Question

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Fred's Cobb-Douglas utility function implies that his preferences exhibit diminishing marginal rates of substitution between the two goods, leading to a convex indifference curve. Sally's perfect substitutes utility function implies a linear indifference curve, resulting in different price offer curves for the two individuals.

Fred Has a Cobb-Douglas Utility Function with Exponents That Sum