5.20. Lou’s preferences over pizza (x) and other goods

( y) are given by U(x, y) ! xy, with associated marginal utilities MUx ! y and MUy ! x. His income is $120.

a) Calculate his optimal basket when Px ! 4 and Py ! 1.

b) Calculate his income and substitution effects of a decrease in the price of food to $3.

c) Calculate the compensating variation of the price change.

d) Calculate the equivalent variation of the price change.