Suppose a consumer’s utility function is given by U(X,Y) = X1/2*Y1/2. Also, the consumer has $72 to spend, the price of Good X, PX = $1, and the price of Good Y, PY = $1. Now suppose PX increases to $9. a)Of the total change in the quantity demanded of Good X, how much is due to the substitution effect and how much is due to the income effect? (Note: since there is an increase in the price of Good X, these values will be negative). b) On a piece of paper, draw on a graph the original budget constraint new budget constraint compensated budget constraint Also, on your graph, indicate the optimal bundle on each budget constraint. Label the optimal bundle on the original budget constraint X* and Y* Label the optimal bundle on the new budget constraint X** and Y**
Suppose a consumer’s utility function is given by U(X,Y) = X1/2*Y1/2. Also, the consumer has $72 to spend, the price of Good X, PX = $1, and the price of Good Y, PY = $1. Now suppose PX increases to $9. a)Of the total change in the quantity demanded of Good X, how much is due to the substitution effect and how much is due to the income effect? (Note: since there is an increase in the price of Good X, these values will be negative). b) On a piece of paper, draw on a graph the original budget constraint new budget constraint compensated budget constraint Also, on your graph, indicate the optimal bundle on each budget constraint. Label the optimal bundle on the original budget constraint X* and Y* Label the optimal bundle on the new budget constraint X** and Y**
Chapter6: Consumer Choice Theory
Section: Chapter Questions
Problem 15SQ
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Suppose a consumer’s utility function is given by U(X,Y) = X1/2*Y1/2. Also, the consumer has $72 to spend, the
Now suppose PX increases to $9.
a)Of the total change in the quantity demanded of Good X, how much is due to the substitution effect and how much is due to the income effect? (Note: since there is an increase in the price of Good X, these values will be negative).
b)
On a piece of paper, draw on a graph the
- original budget constraint
- new budget constraint
- compensated budget constraint
Also, on your graph, indicate the optimal bundle on each budget constraint.
- Label the optimal bundle on the original budget constraint X* and Y*
- Label the optimal bundle on the new budget constraint X** and Y**
- Label the optimal bundle on the compensated budget constraint XCand YC
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