Question
2. Eric purchases Food (F) and clothing (C) and has the utility function U(F, C) = FC. Suppose that he has an income of $72
2.Eric purchases Food (F) and clothing (C) and has the utility function U(F, C) = FC. Suppose that he has an income of $72 per week and that the price of clothing is Pc = $1 per unit. Suppose that the price of food is initially Pf1 = $9 per unit and that the price subsequently falls to Pf2 = $4 per unit. (MUF = C and MUC = F)
a)Find the numerical values of the substitution and income effects on food consumption and graph the results. (Properly annotate all values for F and C as well as utility on the graph with food on the horizontal axis and clothing on the vertical axis).
b)Calculate the compensation variation associated with the decrease in the price of F from $9 to $4.
c)Calculate the equivalent variation associated with the decrease in the price of F from $9 to $4.
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