Question
Assume that Benedict's utility function is u(x, x)=xx. Suppose that, initially, both goods are $1 per unit and that his income is $80. Then,
Assume that Benedict's utility function is u(x, x)=xx. Suppose that, initially, both goods are $1 per unit and that his income is $80. Then, the price of the first good (p) rises to $4. Find the Hicksian substitution and income effects of this price change on the first good. Hint: First, find the optimal allocation at $1 for both goods and then the optimal allocation when good 1 costs $4.
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Optimal Allocation at 1 for Both Goods When the price of both goods is 1 Benedicts budget constraint is px px 80 Substituting p and p with 1 gives us ...Get Instant Access to Expert-Tailored Solutions
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Microeconomics
Authors: Douglas Bernheim, Michael Whinston
2nd edition
73375853, 978-0073375854
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