Question
Adam's utility function is U ( x1; x2 ) = x1x2 (a ssume x1 and x2 are normal goods). The price of good 1 is
Adam's utility function isU(x1; x2) =x1x2(assume x1 and x2 are normal goods). The price of good 1 is P1, the price of good 2 is
P2, and his income is $m a day. Theprice of good 1 suddenly falls.
(a)Represent, using a clearly labelled diagram, the hicks substitution effect, the income effect and the total effect on the
demand of good 1.
(b) On a separate diagram, represent using a clearly labelled diagram, theslutsky substitution effecton the demand of x1
and explain how isit different from the hicks substitution effect.
Please note that youneed to drawindifference curves to represent the optimal bundles.
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