Microeconomics A Contemporary Intro
Microeconomics A Contemporary Intro
10th Edition
ISBN: 9781285635101
Author: MCEACHERN
Publisher: Cengage
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Form Utility
The term utility in general refers to the satisfaction earned from usage of a particular product or service. Utility always plays an important role because it influences various important elements like demand & thereby the price of the good or service as…
Question

Suppose the utility function for goods x and y is given Utility = U(x,y) = xy +y Suppose price of both x and y is $1. You have total $10 to spend. Suppose price of x changed to $0.5. Price of y and your disposable income remain the same:

a. calculates the change in the amount of good x, that is caused by the substitution effect (the effect on consumption due to a change in price holding real income or utility constant).

b. calculate the change in the amount of good x, that is caused by the income effect (the effect on consumption due to a change in real income caused by a change in price). 

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