4. Emma consumes apples and bananas only. Her utility function is given by u(XA,XB) = XAXB. The price of apples is $1, the initial price of bananas is $2, and Emma's daily income is $40. The price of bananas suddenly goes down to $1. (a) Find Emma's optimal daily consumption bundle before and after the change of the price. (b) Illustrate graphically the substitution and income effects in both cases.
4. Emma consumes apples and bananas only. Her utility function is given by u(XA,XB) = XAXB. The price of apples is $1, the initial price of bananas is $2, and Emma's daily income is $40. The price of bananas suddenly goes down to $1. (a) Find Emma's optimal daily consumption bundle before and after the change of the price. (b) Illustrate graphically the substitution and income effects in both cases.
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section6.A: Indifference Curve Analysis
Problem 1SQP
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Question
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![4. Emma consumes apples and bananas only. Her utility function is given by
u(XA,XB) = XAXB.
The price of apples is $1, the initial price of bananas is $2, and Emma's daily income
is $40. The price of bananas suddenly goes down to $1.
(a) Find Emma's optimal daily consumption bundle before and after the change of
the price.
(b) Illustrate graphically the substitution and income effects in both cases.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F165de3f0-09be-46b1-9245-f3fa2a713ee6%2Ffb522d0c-80d0-4cc9-a07b-f8a36cd784e8%2Fz2fqu9d_processed.jpeg&w=3840&q=75)
Transcribed Image Text:4. Emma consumes apples and bananas only. Her utility function is given by
u(XA,XB) = XAXB.
The price of apples is $1, the initial price of bananas is $2, and Emma's daily income
is $40. The price of bananas suddenly goes down to $1.
(a) Find Emma's optimal daily consumption bundle before and after the change of
the price.
(b) Illustrate graphically the substitution and income effects in both cases.
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