Suppose a consumer has a utility function U(x1, x2) = x1x2. The consumer has an income of $24. Initially, p1 = 1 and p2 = 2. The price of good 2 rises to $3, while the price of good 1 stays the same. The consumer’s demand function is given by D1(p1, p2, m) = m 2p1 for good 1 and D2(p1, p2, m) = m 2p2 for good 2. Find the following:
a) How many units of good 1 and good 2 are demanded by the consumer before the price change?
b) Find the consumer’s m0 at which her old bundle is affordable.
c) Find the consumer’s substitution effect for good 2.
d) Find the consumer’s income effect for good 2.
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