Emelia inherits a collection of 100 Michael Jackson’s CDs (good XA) and 50 Madonna’s CDs (good XB). Her utility function is U(XA, XB) = XA^2 XB^2 Initially, the price of Jackson’s CDs PA= £5 and the price of Madonna’s CDs is PB= £10. Following the success of the “This is it”, the price of Michael Jackson’s CDs increases to P'A = £10 while the price of Madonna’s CDs remains unchanged. Show on your diagram how is Emelia's budget constraint affected by the price change? Create a clear and well explained (including all available information) diagram to illustrate her original and new (after the price change) optimal consumption bundles, the substitution effect of the price change, the ordinary income effect of the price change and the endowment income effect of the price change. the diagram should show the original budget constraint, the original and new optimal consumption bundles, the substitution effect, the ordinary income effect, and the endowment income effect. The movement from point A to point C represents the combined impact of substitution and income effects. Write down on the diagram the original and the price to where it changes to show your clear answer just by looking on diagram..
Emelia inherits a collection of 100 Michael Jackson’s CDs (good XA) and 50 Madonna’s CDs (good XB). Her utility function is U(XA, XB) = XA^2 XB^2 Initially, the price of Jackson’s CDs PA= £5 and the price of Madonna’s CDs is PB= £10. Following the success of the “This is it”, the price of Michael Jackson’s CDs increases to P'A = £10 while the price of Madonna’s CDs remains unchanged. Show on your diagram how is Emelia's budget constraint affected by the price change?
Create a clear and well explained (including all available information) diagram to illustrate her original and new (after the price change) optimal consumption bundles, the substitution effect of the price change, the ordinary income effect of the price change and the endowment income effect of the price change. the diagram should show the original budget constraint, the original and new optimal consumption bundles, the substitution effect, the ordinary income effect, and the endowment income effect. The movement from point A to point C represents the combined impact of substitution and income effects.
Write down on the diagram the original and the price to where it changes to show your clear answer just by looking on diagram..
Step by step
Solved in 3 steps with 5 images
