8) Suppose a consumer's utility function is defined by u(x,y)=3x+y for every x>0 and y>0 and...

Question

Question

Answer 1

Answer #1

MRS = MUx/MUy = 3

Px/Py = 1

As MRS > Px/Py

MUx/Px > MUy/Py

Only X is consumed, X* = M/Px = 100

Y* = 0

After price change, Px'/Py = .5

Now, MRS > Px'/Py

3> .5

Now MUx/Px' > MUy/Py

Again only X is consumed, X" = 100/.5 = 200

so only income effect exists, no SE is possible

IC1: 3x + y = 300

IC2: 3x + y = 600

BC1: x+y = 100

BC 2: .5x+y = 100

Answer 2

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