Question: Adam's utility function is U ( x1; x2 ) = x1x2 (a ssume x1 and x2 are normal goods). The price of good 1 is

Adam's utility function isU(x1; x2) =x1x2(assume x1 and x2 are normal goods). The price of good 1 is P1, the price of good 2 is

P2, and his income is $m a day. Theprice of good 1 suddenly falls.

(a)Represent, using a clearly labelled diagram, the hicks substitution effect, the income effect and the total effect on the

demand of good 1.

(b) On a separate diagram, represent using a clearly labelled diagram, theslutsky substitution effecton the demand of x1

and explain how isit different from the hicks substitution effect.

Please note that youneed to drawindifference curves to represent the optimal bundles.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!

Q:

Tim consumes haircuts (1) and sandwiches (x2). His utility function is: u (x1, x2) = (x1) (x2)1-0 The price of x1 is p and the price of x2 is p2. He has a total income of m. 1. Find Tim's demand...

Q:

3. Some economists have proposed to increase the tax on gasoline, then rebate the tax revenue to consumers through a payroll tax reduction or some other means. In this exercise you explore whether...

Q:

Suppose Bethany has m = $100 to spend on alcoholic beverages, x1, and nonalcoholic beverages, x2. The price of alcoholic beverages is p1 = 1 per unit and the price of nonalcoholic beverages is p2 = 2...

Q:

Suppose Bethany has m = $100 to spend on alcoholic beverages, x1, and nonalcoholic beverages, x2. The price of alcoholic beverages is p1 = 1 per unit and the price of nonalcoholic beverages is p2 = 2...

Q:

Question 2: (a) Suppose Gareth has the endowment (w1, w2) = (8, 6), and the prices of goods x1 and x2 are p1 = 3 and p2 = 1. What is the equation of Gareth's budget line? Draw a graph of Gareth's...

Q:

Question 4 (20 points) Suppose a consumer's utility function is u = x, x2' Suppose x1 is an inferior good, and its price decreased from p to p , where P10 > Pli What is the predicted effect of the...

Q:

man2 Exercise #1. Annas preferences over consumption bundles (x1,x2) are summarized by the utility function U (x1,x2) = x1 (x2 + 1)2. (a) Derive an algebraic expression for the marginal utility MU1...

Q:

1The Slutsky equation For each of the following utility functions, i) U ( x 1 , x 2 ) = ax b + x 2 , where a > 0 and0

Q:

Solve all of the following in details Exercise #1. The supply ofprivate apartments for rent around Chill is given by the following function '35 = lm. where Q3 denotes the quantity of apartments...

Q:

Jamal has a utility function of Ub = X 1 , X 2 = (X 1 +2) x (X 2 + 3). He also has income m and faces price P1 and Ps for goods X1 and X2 respectively. What is Jamal's MRS of good 1 for good 2?...

Q:

A pump has faild in a facility that will be completely replaced in 3 years. A brass pump costing $6000 installed will last 3 years. However, a used staniless steel pump that should last 3 more years...

Q:

One of your acquaintances notes, This whole subject of differential costing is easy; variable costs are the only costs that are relevant. How would you respond?

Q:

Your company wants to see which email subject line will perform the best. This is called _ _ _ _ _ _ _ _ _ _ . One - two testing A / B testing User testing Frequency testing

Q:

Ninety kilograms of sodium nitrate is dissolved in 110 kg of water. When the dissolution is complete (at time r = 0), pure water is fed to the tank at a constant rate m (kg/min), and solution is...

Q:

Alternative Payment Options Kathy Clark owns a small company that makes ice machines for restaurants and food-service facilities. Kathy knows a great deal about producing ice machines but is less...

Q:

Phased-Array Radar in one common type of radar installation, a rotating antenna sweeps a radio beam around the sky. But in a phased-array radar system, the antennas remain stationary and the beam is...

Q:

Steam flowing through a long, thin-walled pipe maintains the pipe wall at a uniform temperature of 500 K. The pipe is covered with an insulation blanket comprised of two different materials, A and B....

Q:

Discuss at least two items that are important to the value of companies like Intel or IBM but that are not recorded in their balance sheets. What are some reasons why these items are not recorded in...

Q:

What is a control chart that monitors changes in the mean value of a process? Select one: : a. X-bar chart b. p-chart c. OC chart O d. C-chart e. R-chart

Q:

Do not move closer than an arms distance. (This distance literally applies to Northern Europe. In Southern Europe this distance is slightly smaller.) If you get closer than this distance, you seem...

Q:

2. Now list, after going through a-c, three things that you want to be the impres-sion you want others to be left with after meeting you, and that you want to be lasting over time. List four points...

Q:

Relax your shoulders