1. Cost of living will become more expensive fuelled by increases in food and electricity bill. Suppose the utility function for a customer in the rural area is estimated to be U=F^0.5E^0.5where F is the amount of food consumed and E represent electricity usage. If the consumer income is $10,000 per week and the price of food is $500 and the electricity cost $200.

1. Calculate the optimal bundles when the electricity rate increases to $250

(3 marks)

1. What is the income and substitution effect of the price increase?

(2 marks)

1. Illustrate the income and substitution effect on a well labeled diagram,