Question

please in part b graph it with identifying everything.

2. Consumer Theory. Ahn's utility function for goods X (pizzas) and Y (cola) is represented as U(X, Y) = 2ln(X)+ln(Y). The prices of X and Y are $1 and $1, respectively. Ahn's income is $12. 1) Calculate Ahn's optimal consumption bundle (X*, Y*). (X*, Y*)= 2) Suppose there is an increase in the price of X. Illustrate the net effect, income effect, and substitution effect on Ahn's optimal consumption choice.

Answer 1

U(XY) = 210(X) +inly) Px= $1 Py= $1 m= $12 Consumea will optimise its utility co marimize I his level de utility ata point where 2 Slope of Inclifferenie - Curre - slope of Budget Live MRS = -mux gy

Ulassinate Date Page but x în Budget line El Pre-x+ ly.y=m x + y = 12 Gyt y = 12 - 3y =12 lys y LIE Suppose there is an Increase 7 in Price of then, Budget line will get skeeper Tas slope of Budget live gincrease since, due to ignoreet in price demand Bundle foo (x4) with Chenge

r- Price Effect = Substitution Effect — Income Effect Substitution Effect ! It refers to change in Relative Price pato keeping Purchasing power constant Bneome Effect It refers to Change in a purchasing Power, keeping relative Price Reto constant _ o x" tx." i substitution queone Effeer Effect

Page As shown in the greeph 1 As pecice of x increases, due to substitution Il effect consumer will substitute As a result, new optimal Bundle will change from Eto El. is The the Difference se and se, Substitution effect. As, Pecice Increases, purchasing power of tre consumele deevesses as a resuit due to gnome effect new equilibrium is at få The Difference between ser and act, is the gnome effecte The o' and se", is Price effect which is the sum of Substitution effect and gnome effect