Question

5. Suppose an individual's utility function is U(x, y) = Vx+2. Vy, and her total budget is $90. The price of y is always $1, but the price of x drops from $1 to 50 cents. Calculate the substitution effect on x and the income effect on y. a. SE= +32 X; IE= +10 Y b. SE= +32 X; IE= - 22 Y c. SE= +18 X; IE= - 22 Y d. SE= +18 X; IE= +10 Y

Answer 1

Oulx, y) = 5x +ary total Budget - ad MRS- Lue latty go when Px=y=1, At optionality MRS=Prily Budget x 4290 54-90 x 18) 4/4=728 vtility = 88 +2672= 2.8284116.9705 = 19.7989 When puis reduces to 0.50 ie so cents Again at optionality of os Ty_x} Budget 0.5x+y=90 Point ( x-go 90060 4 4 =60) In order to get same initier Wildtig at new price tag] u=19,7939 = 5x+28x = 35x) perui. - (14.7 9 8 7) 43.5 8 | 8 Tuone read at new lase+y=81 1 4 4.54 x=y=43.55] Points A to B is substitution affect 0 Paint Pent Brocis Income Effer A Ans is