= A consumer with the utility function U (x₁, x₂) = x₁x₂ faces prices P₁ $4, P₂ = $5 and has an income of $100. Suppose the price of the first good rises to $8. Compute the Slutsky substitution and income effects of this price change. Hint: the intermediate budget line now corresponds to a higher income than the consumer's original income, to ensure she can still afford her original bundle at the new prices. Suppose the preferences of the consumer in (1) were instead described by U (x₁, x₂) = 2x₁ + x₂. Compute the Slutsky substitution and income effects of this price change. Hint: answer this using a graph.
= A consumer with the utility function U (x₁, x₂) = x₁x₂ faces prices P₁ $4, P₂ = $5 and has an income of $100. Suppose the price of the first good rises to $8. Compute the Slutsky substitution and income effects of this price change. Hint: the intermediate budget line now corresponds to a higher income than the consumer's original income, to ensure she can still afford her original bundle at the new prices. Suppose the preferences of the consumer in (1) were instead described by U (x₁, x₂) = 2x₁ + x₂. Compute the Slutsky substitution and income effects of this price change. Hint: answer this using a graph.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A consumer with the utility function U(x₁, x₂) = x³x₂ faces prices p₁ = $4, P₂ = $5
and has an income of $100. Suppose the price of the first good rises to $8. Compute the
Slutsky substitution and income effects of this price change. Hint: the intermediate
budget line now corresponds to a higher income than the consumer's original income,
to ensure she can still afford her original bundle at the new prices.
Suppose the preferences of the consumer in (1) were instead described by
U (x₁, x₂) = 2x₁ + x₂.
Compute the Slutsky substitution and income effects of this price change. Hint: answer
this using a graph.
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