Assume that Benedict's utility function is u(x, x)=xx. Suppose that, initially, both goods are $1 per...
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Assume that Benedict's utility function is u(x₁, x₂)=√√x₁x₂. Suppose that, initially, both goods are $1 per unit and that his income is $80. Then, the price of the first good (p₁) rises to $4. Find the Hicksian substitution and income effects of this price change on the first good. Hint: First, find the optimal allocation at $1 for both goods and then the optimal allocation when good 1 costs $4. Assume that Benedict's utility function is u(x₁, x₂)=√√x₁x₂. Suppose that, initially, both goods are $1 per unit and that his income is $80. Then, the price of the first good (p₁) rises to $4. Find the Hicksian substitution and income effects of this price change on the first good. Hint: First, find the optimal allocation at $1 for both goods and then the optimal allocation when good 1 costs $4.
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Optimal Allocation at 1 for Both Goods When the price of both goods is 1 Benedicts budget constraint is px px 80 Substituting p and p with 1 gives us ... View the full answer
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