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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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