Consider a consumer whose preferences can berepresented by the utility function u(x, y) = x + y(a) Originally, px = 1, py = 2 and m = 1. Whatbundle does the consumer choose,and what is his utility from this bundle?(b) The price of good x then rises to 3. Whatbundle does the consumer choose after the pricechange, and what is his utility from this bundle?(c) Calculate the compensating variation. (Hint: atthe new price ratio, what good will he spend hisincome on?)(d) Calculate the equivalent variation.

utility function measures the welfare or satisfaction of a consumer as a function of the consumption…

Consider a consumer whose preferences can be represented by the utility function u(x, y) = x + y Ca) Originally, px = 1, py = 2 and m = 1. What bundle does the consumer choose, and what is his utility from this bundle? b) The price of good x then rises to 3. What

Consider a consumer whose preferences can be represented by the utility function u(x, y) = x + y Ca) Originally, px = 1, py = 2 and m = 1. What bundle does the consumer choose, and what is his utility from this bundle? b) The price of good x then rises to 3. What

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Chapter1: Making Economics Decisions

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Question

Consider a consumer whose preferences can be
represented by the utility function u(x, y) = x + y
(a) Originally, px = 1, py = 2 and m = 1. What
bundle does the consumer choose,
and what is his utility from this bundle?
(b) The price of good x then rises to 3. What
bundle does the consumer choose after the price
change, and what is his utility from this bundle?
(c) Calculate the compensating variation. (Hint: at
the new price ratio, what good will he spend his
income on?)
(d) Calculate the equivalent variation.

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