Question: Economic 1. Consider an individual with the Cobb-Douglas utility function u(x,y)=x0.4y0.6, facing an income I and prices px and py for goods x and y,

Economic

1. Consider an individual with the Cobb-Douglas utility function u(x,y)=x0.4y0.6, facing an income I and prices px and py for goods x and y, respectively. Assume px=$3 and py=$2 and income of I=$100. In this context, only the price of good x decreases to px=$2.

Find the demand for each good, both before and after the price change. This represents the total effect of the price change.

choices: 8.67, 6.67, 5.5, 10.33

a. Find the decomposition bundle.

choices:(17.01, 25.52),(10.91, 35.50),(15.01, 25.52),(20.01, 10.52)

b.Identify which part of the total effect originates from the substitution effect

choices: -2.99, 2.99, 5.4, 3.68

c.Identify which part of the total effect originates from the income effect.

choices: 3.86, -3.68, 2.99, -5

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