Question
Eric has the utility function U ( x , y ) = 0.5x^0.5y^0.5. Now suppose that he has an income of $256per week and that
Eric has the utility functionU(x,y) = 0.5x^0.5y^0.5. Now suppose that he has an income of $256per week and that the price of y isPy= $4per unit. Suppose that the price of x is initiallyPx1= $4per unit and that the price subsequently increases toPx2= $16per unit.
Eric's initial consumption basket is A. At the final basket C, when the price of food is $16, Eric buys?units of x. The price effect is?units of food. The decomposition basket is B.At Basket B,Eric gets the initialutility level, u(x,y)=?. Basket B contains?units of x. Therefore, the substitution effect is?units of food, and the income effect is?units of food.
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