1. Imagine you consume two goods, K and L, and your utility function is U = K1/3L2/3. Your budget is $120; PK = $6; PL = $9. So, the optimal bundle for you to consume is (K = 6.6667, L = 8.8889). Now, suppose the price of good K increases to $9. What is the new optimal K for you to consume?

2. Imagine you consume two goods, K and L, and your utility function is U = K^1/3L^2/3. Your budget is $120; P_K = $6; P_L = $9. So, the optimal bundle for you to consume is (K = 6.6667, L = 8.8889). Now, suppose the price of good K increases to $9. The compensated price bundle is (K = 5.0976, L = 10.1952). What is the income effect on K?

Answer rating: 100% (QA)

1Since the price of good L is still 9 the optimal bundle is still L 88889 Now to ... View the full answer