A consumer buys two goods, good X and a composite good Y. The utility function is...

Question

Question

A consumer buys two goods, good X and a composite good Y. The utility function is given as U(X, Y) = 2X^1/2+Y.

The demand function for good X is X = (Py/Px)². (Edit: The price of X is Px, the price of Y is Py.)

Suppose that initially Px=$0.5 and then it falls and becomes Px=$0.2

Calculate the substitution effect, income effect, and the price effect and show the answer graphically.

Answer 1

Answer #1

Answer 2

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