Suppose a consumers utility function is given by U(X,Y) = MIN (4X, Y). Also, the consumer has $42 to spend, and the price of Good X, PX = $2. Let Good Y be a composite good (Good Y is the numeraire) whose price is PY = $1. So on the Y-axis, we are graphing the amount of money that the consumer has available to spend on all other goods for any given value of X.

a) How much X and Y should the consumer purchase in order to maximize her utility?

b) How much total utility does the consumer receive?

c) Now suppose PX increases to $3.

i) Calculate the Compensating Variation. (Note that since PX increases, the CV will be a positive number.) CV =

ii) Calculate the Equivalent Variation. (Note that since PX increases, the EV will be a positive number.) EV =

d) After the price of Good X changes from $2 to $3, how much of the total change in quantity demanded for Good X is due to the Substitution Effect? SE =