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Isha has $200 and consumes two goods X and Y. Isha's utility function is given by U (x, y) = x*y (x times y) where
Isha has $200 and consumes two goods X and Y. Isha's utility function is given by U (x, y) = x*y (x times y) where x and y denote the amount of Goods X and Y consumed respectively. Both goods cost $5 each to start with but the government has decided to tax Good Y resulting in an increase in the price of Good Y from $5 per unit to $10 per unit. (i) How much extra money must Isha be given so that she can buy the consumption bundle she would have bought at the initial prices of $5 each for both Goods X and Y? (2 marks) (ii) How much extra money must Isha be given so that she can attain the same level of utility as before the change in the price of Good Y? (3 marks) (iii) What amount of X and Y would Isha consume if the government gave her enough money to buy the previous consumption bundle; i.e., the amount you found in your answer to Part (i) above? (2 marks)
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