Charlie’s utility function is u= xy. Initially, the price of x was $1, the price of y was $2, and his income was $80. Now the price of x rises to $2, ceteris paribus. Charlie’s (Slutsky) substitution effect is to reduce his consumption of good x by __________. No diagram required

Charlie’s utility function is u= xy. Initially, the price of x was $1, the price of y was $2, and his income was $80. Now the price of x rises to $2, ceteris paribus. Charlie’s (Slutsky) substitution effect is to reduce his consumption of good x by __________. No diagram required

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Consider a consumer who consumes two goods. The utility function is given by u(x1, x₂) /2x1+1+√√√x₂, - where x > 0 denotes the amount of good i = the price of good 1 is 3, the price of good 2 is p2 > 0, and the income is 12. 1,2 consumed. Unless stated otherwise, (1) Calculate the marginal rate of substitution (measuring the value of good 1) at the consumption plan (x₁, x₂) = (3, 4). (2) Calculate the consumption plan that is optimal for the consumer. (3) Let v(p₂) denote the utility level at the optimal consumption plan. Calculate its derivative with respect to p2, i.e., v'(P2), at p2 = 3. (4) Suppose that p2 = 1 and the utility level is 10. Calculate the compensated demand for each good.
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