7. [5 points] Let a consumer's utility function be U(x, y) = VVg. The consumer's income is I = 3, 200 and prices for the two goods are, respectively, p = 2 and p, = 8. %3D (a) Write down the utility maximization problem and compute the optimal consumption basket. (b) Suppose the price of good y decreases to p, = 2. Compute the new optimal consumption basket. (c) Compute and represent graphically the substitution, income and total (price) effects. Is good y ordinary or Giffen for the consumer, and why?

7. [5 points] Let a consumer's utility function be U(x, y) = VVg. The consumer's income is I = 3, 200 and prices for the two goods are, respectively, p = 2 and p, = 8. %3D (a) Write down the utility maximization problem and compute the optimal consumption basket. (b) Suppose the price of good y decreases to p, = 2. Compute the new optimal consumption basket. (c) Compute and represent graphically the substitution, income and total (price) effects. Is good y ordinary or Giffen for the consumer, and why?

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter6: Consumer Choice And Demand

Section: Chapter Questions

Problem 2.5P

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