Charlie consumes apples (A) and bananas (B). His utility function is . The price of apples is $1, the price of bananas is $2, and Charlie’s income is $40. The price of bananas suddenly falls to $1. (a) Before the price change, how many apples and bananas did Charlie consume? (b) After the price change, how many apples and bananas did Charlie consume? (c) If after the price change, Charlie’s income had changed so that he could only attain his original level of utility, how many apples
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2. Charlie consumes apples (A) and bananas (B). His utility function is . The
of apples is $1, the price of bananas is $2, and Charlie’s income is $40. The price of bananas
suddenly falls to $1.
(a) Before the price change, how many apples and bananas did Charlie consume?
(b) After the price change, how many apples and bananas did Charlie consume?
(c) If after the price change, Charlie’s income had changed so that he could only attain his
original level of utility, how many apples and bananas would he have consumed?
(d) What are the magnitudes of the price, substitution, and income effects for the
consumption of bananas?
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