Consider an individual making choices over two goods, x and y with initial prices px=5 and py= 2, with income I= 100:

a) If the individual's preferences can be represented by the utility function u = 4x+ 2y; find the income, substitution and total effects of a decrease in the price of x to px= 3.

b) If the individual's preferences can be represented by the utility function u = min(4x,2y); find the income, substitution and total effects of a decrease in the price of x to px= 3.

c) If the individual’s preferences can be represented by the utility function u= 4xy, and the income, substitution and total effects of a decrease in the price of x to px= 4.

Answer rating: 100% (QA)

a Utility function u 4x 2y Income effect The decrease in the price of x from px5 to px3 increases the individuals purchasing power allowing them to bu... View the full answer