1 Problem 1Suppose a consumer has utility function u(a1, a2) = x + x.(a) Compute the Marginal Rate of Substitution.(b) Find the optimal bundle x(p, w) and the indirect utility function v(p, w).(c) Find the Hicksian demand bundle h(p, u) and the expenditure function e(p, T).(d) Suppose w = 24 and that prices change from p= (4,2) to p = (3, 3). Compute (i) thesubstitution and income effects for this price change, and (ii) the Hicksian substitutionand income effects for this price change.%3D

(a) MRS = MUx1MUx2 = 12x112x2= x2x1 (b) To find: Optimal bundle: x(p, w) Equating MRS to price…

Suppose a consumer has utility function u(r1, r2) = + x. (a) Compute the Marginal Rate of Substitution. (b) Find the optimal bundle z(p, w) and the indirect utility function v(p, w). (c) Find the Hicksian demand bundle h(p, u) and the expenditure function e(p, u). (d) Suppose w = 24 and that prices change from p (4,2) to p (3,3). Compute (i) the substitution and income effects for this price change, and (ii) the Hicksian substitution and income effects for this price change.