Question

01 Question (4 points) See page 139 A consumer has a utility function given by u(x,y) - min(x, y). The price of an is $4, and the price of yis 54. The consumer has $4800 to spend on these two goods. In the questions below. give your answers to two decimal places 1st attempt Part 1 (2 points) See Hint The optimal bundle is units of and units of y Part 2 (2 points) See Hint Now suppose that the price of increases by $2.00 from $4 to $6.00, The optimal is now units How much of the change in x is due to the income effect?

Answer 1

u = min(x, y)

(Part 1)

For fixed proportion utility function, x and y are complements and utility is maximized when x = y.

Substituting in budget line,

4800 = 4x + 4y

1200 = x + y

1200 = x + x = 2x

x = 600.00

y = 600.00

(Part 2)

Substituting x = y in new budget line,

4800 = 6x + 4y

4800 = 6x + 4x = 10x

x = 480.00

Since x and y are complements, substitution effect is zero and entire change in x is due to income effect.

Income effect = 480 - 600 = - 120.00 (if you need to input a positive number, enter 120.00)