Question: Consider the utility function u(x1,x2)= x1,x2. Initially p1=$1 and p2=$2 . Income is $15 1. Derive the optimal consumption bundle. [05 pts] 2. If the

Consider the utility function u(x1,x2)= x1,x2. Initially p1=$1 and p2=$2 . Income is $15

1. Derive the optimal consumption bundle. [05 pts]

2. If the price of good 1 doubles to $ 2, derive the new consumption bundle. [03 pts]

3. Decompose the change in consumption of good 1 into the income and substitution

effect, and illustrate your answer with a graph. [05 pts]

4. Compute the Compensation variation (CV) and the Equivalent Variation (EV). [07 pts]

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