Question: Question 4 (60 points total) Matt's preferences over commodities x1 and x2 can be represented by the utility function, (1, 2) = x1 + 42.

Question 4 (60 points total) Matt's preferences over commodities x1 and x2 can be represented by the utility function, (1, 2) = x1 + 42. Matt has $12 in income, p1 is $2 and p2 is $4.

A. (10 points) What commodity bundle will maximize Matt's utility? Explain your answer carefully.

B. (10 points) Suppose p1 falls to 50 cents. What is Matt's new utility maximizing commodity bundle? Explain your answer carefully

C. (20 points) What is the total change in Matt's consumption of x1 as a result of the fall in the price of x1 from 2 dollars to 50 cents? Decompose this total change into income and substitution effects (I am looking for specific numbers for Matt).

D. (20 points) What is Matt's compensating variation for the p1 decline? Explain your answer.

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