Calculating substitution and income effects and compensating and equivalent variation Suppose u(x,y) = xy. Let px = 1, py= 1 and m = 30. Find the consumer's demand functions for x and y, as functions of prices and income. Hint: What kind of utility function are we dealing with here and what do you know about expenditure shares when we have that type of utility function? 142 113 V3 u(P. Pcm) (2-) (2) (9)" (20.juba) = Leater 30 x= m 3px At those specific values of prices and income, what combination of x and y will our consumer select? Call this bundle A. Now suppose py rises to 2, while px and m are unchanged. What combination of x and y will our consumer now select? Call this bundle B. This movement from bundle A to bundle B is called the Jetal effect effect. 4-> 13 2m Let's find the Slutsky substitution and income effects. 350 What i What income would our consumer require in order to be able to still just afford the original consumption bundle at the new prices? I had tent, what would then do The income effect has the consumer changing from bundle 233 hapter If s/he had that level of income and faced the new prices, what bundle would s/her select? Call this bundle C. unothera!, Income adjusted The substitution effect of the price change has the consumer changing from bundle Started 4-12 to bundle Lees Jo what world we do attif to bundle