Problem 1 Ava has an income of $1,500 and she spends her income on two goods (1 and 2). Her utility function is u(x₁, x₂) = x1x2, where x₁ is the amount of good 1 she consumes, and x₂ is the amount of good 2 she consumes. The price of good 1 is $3 per unit, and the price of good 2 is $1 per unit. Suppose the price of good 1 rises to $4 per unit. (a) Calculate the substitution effect and the income effect of the price change on Ava's consumption of good 1. (b) Is good 1 a normal good or an inferior good to Ava?
Problem 1 Ava has an income of $1,500 and she spends her income on two goods (1 and 2). Her utility function is u(x₁, x₂) = x1x2, where x₁ is the amount of good 1 she consumes, and x₂ is the amount of good 2 she consumes. The price of good 1 is $3 per unit, and the price of good 2 is $1 per unit. Suppose the price of good 1 rises to $4 per unit. (a) Calculate the substitution effect and the income effect of the price change on Ava's consumption of good 1. (b) Is good 1 a normal good or an inferior good to Ava?
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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Transcribed Image Text:Problem 1
Ava has an income of $1,500 and she spends her income on two goods (1 and 2). Her utility function
is u(x₁, x₂) = x1x², where x₁ is the amount of good 1 she consumes, and x₂ is the amount of
good 2 she consumes. The price of good 1 is $3 per unit, and the price of good 2 is $1 per unit.
Suppose the price of good 1 rises to $4 per unit.
(a) Calculate the substitution effect and the income effect of the price change on Ava's
consumption of good 1.
(b) Is good 1 a normal good or an inferior good to Ava?
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