Question

5. Douglas consumes two goods, x and y. His utility function is u(x) = Vx+y Let the price of good x be $2 and the price of good y be $2. Furthermore, assume that Douglas has $420.00 to spend on these two goods. Find the demand for good x and y. Now suppose that the price of good x decreases to $1.00. What is the income effect and substitution effect of this price change on the demand for x?

Answer 1

U= x+y. Pa=2 classia Py M=420. Date Page Poc for Whility maximizohong MRSA 5 MRSAY Pa Py Quar MUX MUY gulay are RY 4 a(Px, Py, m) = 0.25 419.5 - 420- 209.75 w New Aphimizabon > MRS = Pa Ру 420- XCP2, Py, m) = 1 = 419 2 209.5 W Subeo effed = a(Pra, Pito) - 2 (Pre, Pw, m) Apax = sm ) (-1) (0,25) = am - sma 0025 m = 420 - 0.25 = 419.75 don't regulee in to find out the get allal, Pym) - 2 CP, Py , m), = 1 i Sf. 2 1 0.75 4 w wome-ottest a(prel, Py, m) - X (Pri lv, m). for all goguide only price ratio i same o Py for both