Utility is given by U(x1; x2) = x1x2. Marginal utilities are MU1 = x2, and MU2 = x1. The price of x1 is $1, the price of x2 is $2, and income is $40. The price of x2 falls to $1. (c) What is the substitution effect of the price change? Illustrate on the graph. (d) What is the actual optimal consumption choice after the price change? Illustrate on the graph and label that choice C. (e) What is the income effect of the price change? Illustrate on the graph.
Utility is given by U(x1; x2) = x1x2. Marginal utilities are MU1 = x2, and MU2 = x1. The price of x1 is $1, the price of x2 is $2, and income is $40. The price of x2 falls to $1. (c) What is the substitution effect of the price change? Illustrate on the graph. (d) What is the actual optimal consumption choice after the price change? Illustrate on the graph and label that choice C. (e) What is the income effect of the price change? Illustrate on the graph.
Chapter21: Demand: Consumer Choic
Section: Chapter Questions
Problem 8E
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2. Utility is given by U(x1; x2) = x1x2.
price of x2 is $2, and income is $40. The price of x2 falls to $1.
(c) What is the substitution effect of the price change? Illustrate on the graph.
(d) What is the actual optimal consumption choice after the price change? Illustrate on the graph and
label that choice C.
(e) What is the income effect of the price change? Illustrate on the graph.
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