You have preferences described by u(x,y)=2x+7y. Your income is I and prices are px =1, py...

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You have preferences described by u(x,y)=2x+7y. Your income is I and prices are px =1, py...

You have preferences described by u(x,y)=2x+7y. Your income is I and prices are px =1, py =4.

a) Decompose the eﬀect of a change in the price of px from 1 to 3 into an Income and Substitution Eﬀect for x and y. Note: Unless speciﬁed otherwise, you can assume that the price of the other good remains unchanged, i.e. here the price of y remains unchanged at 4.

b) Suppose the government gives you enough income so that you can just aﬀord the original bundle when you face the new prices. Does this compensation make you better oﬀ compared to before the price change? Explain your reasoning.

business economics

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Answer 1

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You have preferences described by u(x,y)=2x+7y. Your income is I and prices are px =1, py...

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You have preferences described by u(x,y)=2x+7y. Your income is I and prices are px =1, py...