Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section: Chapter Questions
Problem 11SQ
Related questions
Question
Transcribed Image Text:Exercise 2:
Suppose Valentine's utility function is U(x, y)=√x+2√y and her income is $90. The
price of y is always $1, but the price of x drops from $1 to 50 cents. Label her optimal
choice of consumption before the price change as (x,y) and the optimal choice of
consumption after the price change as (x,yc). As shown below, the bundle (x,y) will
keep her utility unchanged (Hicksian method) from point A but be consistent with the
new price.
• Substitution effect = x - x₁
Income effect Xc-XB
Total effect XC-X₁.
90
●
●
The goal of this exercise is calculating the exact amount of xxxc
0
B
C
XA XB XC
New budget
constraint
90
XA to Xa: substitution effect
XB to XC: income effect
XA to Xc: total effect
180
old budget
constraint
a) calculate (x,y)
This is the old choice before the price of x changes. The problem can be written as:
max U(x, y)=√x+2+√y
subject to:
px+p, y=x+y=90
b) calculate (x+Yc)
This is the new choice after the price of x changes. The problem can be written as:
max U(x, y)=√x +2√
subject to:
px+p, y=0.5x+y=90
c) calculate (x,ya)
This is the choice that the individual would make if she stays on the same
indifference curve as (x,y) but faces the new price of x.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Exploring Economics
Economics
ISBN:
9781544336329
Author:
Robert L. Sexton
Publisher:
SAGE Publications, Inc
