Suppose a consumer’s utility function is given by U(X,Y) = X1/2*Y1/2. Also, the consumer has $72 to spend, the price of Good X, PX = $1, and the price of Good Y, PY = $1. Now suppose PX increases to $9. a)Of the total change in the quantity demanded of Good X, how much is due to the substitution effect and how much is due to the income effect? (Note: since there is an increase in the price of Good X, these values will be negative).b)On a piece of paper, draw on a graph the original budget constraint new budget constraint compensated budget constraint Also, on your graph, indicate the optimal bundle on each budget constraint. Label the optimal bundle on the original budget constraint X* and Y*Label the optimal bundle on the new budget constraint X** and Y**Label the optimal bundle on the compensated budget constraint XCand YC

Given, U(X,Y) = X1/2*Y1/2 Income of the consumer = $ 72 Price of X = $1 Price of Y= $1 Utility is…

Answered: Suppose a consumer’s utility function…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a consumer’s utility function is given by U(X,Y) = X^1/2*Y^1/2. Also, the consumer has $72 to spend, the price of Good X, P_X = $1, and the price of Good Y, P_Y = $1.

Now suppose P_X increases to $9.

a)Of the total change in the quantity demanded of Good X, how much is due to the substitution effect and how much is due to the income effect? (Note: since there is an increase in the price of Good X, these values will be negative).

On a piece of paper, draw on a graph the

original budget constraint
new budget constraint
compensated budget constraint

Also, on your graph, indicate the optimal bundle on each budget constraint.

Label the optimal bundle on the original budget constraint X* and Y*
Label the optimal bundle on the new budget constraint X** and Y**
Label the optimal bundle on the compensated budget constraint X^Cand Y^C

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