15 10 10 15 20 pose m = 120, P1 = 10, and p2 = 15. The price p, then falls to 6, keeping p2 and m fixed. Siven m = 120 and p2 = 15, the budget B° is drawn for p = 10. The utility-maximizing point on this budget is at A = given the linear preferences yie When p, falls to 6, the new budget is B" and the utility-maximizing point is C = (C | units of good 1. Removing income incrementally until Bunde can barely afford the old utility of Thus the point B = ? v and the substitution effect is The movement fro ] at the new prices yields the line which pas | units of good 1. yielding utility u =| effect of B = units of good 1, while the the income effect is [
15 10 10 15 20 pose m = 120, P1 = 10, and p2 = 15. The price p, then falls to 6, keeping p2 and m fixed. Siven m = 120 and p2 = 15, the budget B° is drawn for p = 10. The utility-maximizing point on this budget is at A = given the linear preferences yie When p, falls to 6, the new budget is B" and the utility-maximizing point is C = (C | units of good 1. Removing income incrementally until Bunde can barely afford the old utility of Thus the point B = ? v and the substitution effect is The movement fro ] at the new prices yields the line which pas | units of good 1. yielding utility u =| effect of B = units of good 1, while the the income effect is [
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:Bunde's preferences are given by the utility function u(x1, x2) = x, + x2. For each of the following cases, decompose the price effects into the substitution and income effects using the Hicks-Allen
decompositions. (For each part, use the given template to draw the constraints, and then use your completed graph to fill in the description. Enter any points in order from left to right as they would appear
on the graph.)
20
15
10
5
10
15
20
(a) Suppose m = 120, P1 = 10, and p2 = 15. The price p1 then falls to 6, keeping p2 and m fixed.
Given m = 120 and p, = 15, the budget B° is drawn for p, = 10. The utility-maximizing point on this budget is at A =
given the linear preferences yielding utility
y° =
When p, falls to 6, the new budget is B" and the utility-maximizing point is C =
), yielding utility un =
. The movement from A to C is the price
effect of
units of good 1. Removing income incrementally until Bunde can barely afford the old utility of
at the new prices yields the line which passes through
B =
Thus the point B = ? v and the substitution effect is
units of good 1, while the the income effect is
units of good 1.
(b) Suppose m = 48, p, = 8, and p, = 4. The price p, then falls to 2, keeping p, and m fixed.
Given m = 48 and p, = 4, the budget Bo is drawn for P, = 8. The utility-maximizing point on this budget is at A =
given the linear preferences yielding utility
u° =
When p, falls to 2, the new budget is B" and the utility-maximizing point is C=
yielding utility un =
The movement from A to C is the price
effect of
units of good 1. Removing income incrementally until Bunde can barely afford the old utility of
at the new prices yields the line which passes through
B =
Thus, the substitution effect is
units of good 1, while the the income effect is
units of good 1.
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