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Consider the utility function u(x,y) = 2lnx

by | Nov 29, 2023 | Posted Questions

Consider the utility function u(x,y) = 2lnx+ lny. Initially, the prices are px= $2/unit and py= $1/unit. The consumer has an income of $24. Illustrate your answers with graphs.

(a) Derive the consumer’s optimal consumption bundle.

(b) Now suppose the price of good xincreases to = $3/unit. What is the new optimal consumption bundle?

(c) Calculate the substitution effect and the income effect.Illustrate it on a graph.

(d) Calculate the compensating variation and equivalent variation of the price change.

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