1. For each of the three utility functions below, find the substitution effect, the income effect, and the total effect that result when prices change from p = (2,1) to p' = (2,4). Assume the consumer has income I = 20. (a) Before doing any calculation, make an educated guess about the relative magnitude of the three substitution effects and the three income effects to be found below. (b) u(x1,x2) = x1 +x2. (c) u(x1,x2) = x1x2. (d) u(x1,x2) = min {x1,x2).

1. For each of the three utility functions below, find the substitution effect, the income effect, and the total effect that result when prices change from p = (2,1) to p' = (2,4). Assume the consumer has income I = 20. (a) Before doing any calculation, make an educated guess about the relative magnitude of the three substitution effects and the three income effects to be found below. (b) u(x1,x2) = x1 +x2. (c) u(x1,x2) = x1x2. (d) u(x1,x2) = min {x1,x2).

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Marginal Rate of Technical Substitution

MRTS reaches a manufacturer when a part of the product is lowered to sustain the manufacturing level when the other part is extended. It is the level of the quantity that is lowered when one extra volume is used, and the output is unchanged.

Preferences and Utility Analysis

Before understanding what is preference and utility analysis, it is very important to understand the terms preference and utility separately.

Question

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1. For each of the three utility functions below, find the substitution effect, the
income effect, and the total effect that result when prices change from p = (2,1)
to p' = (2,4). Assume the consumer has income I = 20.
(a) Before doing any calculation, make an educated guess about the relative
magnitude of the three substitution effects and the three income effects to
be found below.
(b) u(x1, x2) = x1 + x2.
(c) u(x1, x2) = x1x2.
(d) u(x1,x2) = min {x1,x2).
(e) Rank the substitution effects and the income effects found above by their
magnitude. To what extent do they conform to your guess?

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