Cost of living will become more expensive fuelled by increases in food and electricity bill. Suppose the utility function for a customer in the rural area is estimated to be U=F0.5E0.5where Fis the amount of food consumed and E represent electricity usage. If the consumer income is $10,000 per week and the price of food is $500 and the electricity cost $200. a) Calculate the optimal bundles when the electricity rate increases to $250 b) What is the income and substitution effect of the price increase? c) Illustrate the income and substitution effect on a well labeled diagram,
Cost of living will become more expensive fuelled by increases in food and electricity bill. Suppose the utility function for a customer in the rural area is estimated to be U=F0.5E0.5where Fis the amount of food consumed and E represent electricity usage. If the consumer income is $10,000 per week and the price of food is $500 and the electricity cost $200. a) Calculate the optimal bundles when the electricity rate increases to $250 b) What is the income and substitution effect of the price increase? c) Illustrate the income and substitution effect on a well labeled diagram,
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.1P
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