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7. (20 points) (Slutsky Equation) Suppose there is a consumer who has the utility function of u(x1,x2) = xx. The original prices of both
7. (20 points) (Slutsky Equation) Suppose there is a consumer who has the utility function of u(x1,x2) = xx. The original prices of both goods are p = p2 = 2, and the consumer's = income is m = 10. Now, the price of good 1 is changed from 2 to 3, so p = 3, and other things remain the same. (a) Calculate the substitution effect on good 1 from the price change. (b) Calculate the income effect on good 1 from the price change. (c) Assume a quantity tax t 1 on good 1 (before and after the price change). Answer (a) again.
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