Lou's preferences over pizza (x) and other goods (y) are given by U(x, y) = xy, with
Question:
a) Calculate his optimal basket when Px = 4 and Py = 1.
b) Calculate his income and substitution effects of a decrease in the price of food to $3.
c) Calculate the compensating variation of the price change.
d) Calculate the equivalent variation of the price change.
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Step by Step Answer:
a Using the tangency condition and the budget constraint Lous initial optimum is the basket x y 15 6...View the full answer
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