Question: 3. A person has the Utility function u: X1 X2 and an endowment m=100. The person faces prices of P1=5 and P2=1 0 for two

3. A person has the Utility function u: X1 X2 and an endowment m=100. The person faces prices of P1=5 and P2=1 0 for two goods. a) Sketch this person's budget constraint and show the utility maximising level of consumption. Illustrate your working. (4 marks) The price of the good 1 changes such that the new price P1'= 2 b) Sketch the new budget constraint and illustrate the new Utility maximising point. What is value of utility at this point? (4 marks) c) How would the answers to part (a) and (b) change if the Utility function of the person was U=)(1\""25 Kan-75 ? (5 marks) d) Illustrate the substitution and income effects using Slutsky's method. Calculate the numerical value of both of these effects and illustrate them on the diagram. (6 marks)

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