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Kuanysh’s preferences over two goods are given by utility function u(x1, x2) = x1(x2)^3, and the prices of good 1 and good 2 are given by p1 and p2. Let m denote Kuanysh’s income. Find Kuahysh’s price offer curve for the price of good 1.
Fix Kuanysh’s income at m = 60 and the price of good 2 at p2 = 3 and let the price of good 1 change from p1 = 3 to p ′ 1 = 5.
Moving from p1 = 3 to p ′ 1 = 5, consider the Slutsky variant of the Slutsky equation:
(a) What is the intermediate amount of money m′ ?
(b) What is the Slutsky substitution effect?
(c) What is the income effect?
Moving from p1 = 3 to p ′ 1 = 5, consider the Hicks variant of the Slutsky equation:
(a) What are the levels of utility in the two cases?
(b) What is the intermediate amount of money m′ ?
(c) What is the Hicks substitution effect?
(d) What is the income effect?
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