Suppose that you currently hold 4 shares of Google stock and 2 shares of Microsoft stock. Initially both prices are $1 per share, but then the price of Google stock suddenly doubles to $2 per share. Suppose that your preferences are Cobb-Douglas, u(x, y) = xy. Find the optimal portfolio choices under the original prices and the new prices. Show how much of the change in your portfolio (i.e. the change in demand for both goods) is due to pure substitution, pure income, and endowment income effects. (please don't use LaGrange)

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Under the original prices the total value of the portfolio is 41 21 6 The original total utility is u4 2 42 8 The MRS is given by the ratio of the mar... View the full answer