Question

Ross derives utility from only two goods, chocolates (x) and donuts (y). His utility function is as follows:
U(x,y) = 8xy. His marginal utility from chocolates (x) and donuts (y) are given as follows: MU_x = 8y and MU_y = 8x.

Ross has an income of $1800 and the price of chocolates (P_x) is $6 and donuts (P_y) is $4.

b. Suppose price of donuts (P_y) increase to $6.25,  price of chocolates and income remain unchanged. How much is the total effect of this price change on Ross's consumption of donuts? Show your work. How much of this total effect is due to income effect and how much is due to substitution effect (round up your answer up to two decimal places)

Answer 1