Suppose the utility function is U(x,y)=xy². In 2021, Px=1, Py=2. Due to covid, the price of x in 2022 rises to Px=2. Your income is I=150 unchanged in these two years. 1. What is the optimal allocation of x and y before the price change? 2. What is the optimal allocation of x and y after the price change? 3. What are the (approximate) substitution and income effects of this change in prices?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Suppose the utility function is U(x,y)=xy². In 2021, Px=1, Py=2. Due to covid, the price of x in 2022 rises to
Px=2. Your income is I=150 unchanged in these two years.
1. What is the optimal allocation of x and y before the price change?
2. What is the optimal allocation of x and y after the price change?
3. What are the (approximate) substitution and income effects of this change in prices?
Transcribed Image Text:Suppose the utility function is U(x,y)=xy². In 2021, Px=1, Py=2. Due to covid, the price of x in 2022 rises to Px=2. Your income is I=150 unchanged in these two years. 1. What is the optimal allocation of x and y before the price change? 2. What is the optimal allocation of x and y after the price change? 3. What are the (approximate) substitution and income effects of this change in prices?
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