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4. Charlie, vegetarian that he is, consumes only apples and oranges. His utility function is U(XA,X0)=XA. X0 The price of apples is $1, the price
4. Charlie, vegetarian that he is, consumes only apples and oranges. His utility function is U(XA,X0)=XA. X0 The price of apples is $1, the price of oranges is $2 and Charlie's income is $40 a day. The price of oranges suddenly falls to $1 a. Before the price change, Charlie consumed apples and His utility in his consumption is the label A on his chosen consumption bundle. Graph Charlie's original bundle and his preference. Put b. If, after price change, Charlie's income had changed so that he could exactly get the same utility at the point A. With these new prices to get same utility Charlie would consume apples and oranges. Draw the budget line corresponding to this utility and these prices. Label the bundle that Charlie would choose with letter B. c. Does the substitution effect of the fall in the price of oranges make him buy more oranges or fewer oranges? How many more or fewer? d. After the price change, Charlie actually buys apples and oranges. Draw Charlie's actual budget line after the price change. Put the label C on the bundle that he actually chooses after the price change. e. The substitution effect of the price change in oranges is the income effect of the price change in oranges is the total effect is
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