Question 4. Suppose that a consumer has a utility function u(x1; x2) = x1x2. The prices of goods are p1 = $1 and p2 = $2, and the consumer has income $96. Suppose that the government restricts the import of x1 from abroad, so that the price of x1 jumps to $8 per unit.

a) What is the demand function of x1 and x2? (Hint: write demand of those two goods as a function of p1, p2 and consumer's income m. You can use the short cut we talk about in class or Lagrange method or your intuition to derive the optimal demand of x1 and x2).

b) Find out the optimal consumption bundle and the utility level before price increase of x1.

c) Compute the compensation variation (CV) of this consumer when p1 increases to $8.