1. (55 points) Egbert consumes only axes (X) and mead (Y ). His utility function is U = XY , his income is I and the prices of axes and mead are pXand pY respectively. (a) What is Egbert's demand for for axes and mead? (Show all the steps.) (b) What is Egbert's indirect utility function? (c) What is Egbert's compensated demand for axes and mead? (d) What are the numerical values for (b),(c) and (d) if I = 24, pX= 1, pY= 2? (e) Now the price of mead rises to pY= 3. What income would Egbert need to be able to reach his old utility level at the new prices? (f) If he had this income, what quantities of each good would he consume at the new prices? (g) Given his actual income, how much of each good will Egbert consume at the new prices? (h) What is the income effect of this price change? (i) What is the substitution effect of this price change? (j) Show the Slutsky equation holds for this price change. (k) What loss in welfare (in $) does Egbert suffer due to the price change? Give three different possibilities.

2. (5 points) The effect on an isoquant of Hicks-neutral technological progress - redraw this diagram. Show (either on the same diagram or a second one) the effect of labor-saving technological progress. Make clear (on the diagram and with some text) what the difference is between the effects of the two types of technological progress.