Question
Johnny continues to consume burgers and steaks. His utility function is U(xB; xS) = xBxS. The price of burgers is $1, the price of steak
Johnny continues to consume burgers and steaks. His utility function is U(xB; xS) = xBxS. The price of burgers is $1, the price of steak is $2, and his income is $40 a day. The price of steaks suddenly falls to $1.
1. The income effect of the fall in the price of steaks on Johnny's demand for steaks is the same as the effect of what, an increase or a decrease in his income? Of how much? Does the income effect make him consume more steaks or fewer? How many more or how many fewer?
2. Does the substitution effect of the fall in the price of steaks make Johnny consume more burgers or fewer? How many more or fewer? What is the total effect of the change in the price of steak on the demand for burgers?
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