Question: 1 Suppose the utility function is u(x, x2) = xx2 and the budget constraint is px1 +p2x2 = m. (a) Write down the formula

1 Suppose the utility function is u(x, x2) = xx2 and the budget constraint is px1 +p2x2 = m. (a) Write down

1 Suppose the utility function is u(x, x2) = xx2 and the budget constraint is px1 +p2x2 = m. (a) Write down the formula of Slutsky Equation. (b) Suppose (P1, P2, m) (1,2, 20). Compute the total effect, substitution effect, and income effect at this point. Do the sum of the latter two equals total effect? (Hint: you should use the Slutsky Equation in calculus form, if you are asked to compute the three effects at one particular point.) (c) If now the price of good 1 changes to p = 2, all other things being unchanged. Compute the total effect, substitution effect, and income effect due to this change. (Hint 1: this is about how to apply slutsky equation in real economic analysis. Use the graph to help find these effects. Also, try to link the total effect to Marshallian demand, and link substitution effect to Hicks demand.)

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