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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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