Question 1 Consider a consumer with the following quasi-linear utility function U = x² +5y Assume that the consumer faces a price of $1 for good Y, and a total income of S120. The price of good X decreases from $4 to $2. a) Find the optimal basket at the initial price P $4. Label it basket A. b) Find the optimal basket at the final price of P, $2. Label it basket C. c) What is the total effect of the price change? d) Find the decomposition basket (label it B) that will allow us to decompose the total change in X into the substitution effect and the income effect. Recall that the decomposition basket must satisfy two conditions: (1) it must generate the same utility level as the initial bundle A (2) Its tangency occurs with the decomposition budget line that has the same slope as the new budget line. What is the change in X due to the substitution effect? due to the income effect? e) Based on the income effect that you found, is the good X an inferior or a normal good?

Question 1 Consider a consumer with the following quasi-linear utility function U = x² +5y Assume that the consumer faces a price of $1 for good Y, and a total income of S120. The price of good X decreases from $4 to $2. a) Find the optimal basket at the initial price P $4. Label it basket A. b) Find the optimal basket at the final price of P, $2. Label it basket C. c) What is the total effect of the price change? d) Find the decomposition basket (label it B) that will allow us to decompose the total change in X into the substitution effect and the income effect. Recall that the decomposition basket must satisfy two conditions: (1) it must generate the same utility level as the initial bundle A (2) Its tangency occurs with the decomposition budget line that has the same slope as the new budget line. What is the change in X due to the substitution effect? due to the income effect? e) Based on the income effect that you found, is the good X an inferior or a normal good?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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