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EXERCISE 2 (25 points) Michael has a constantelasticityofsubstitution (CES) utility function, u(x1,x2) = (3311 + :0; 1)*1. His ordinary demand function for good 1 is given by: m(P1)_% (100% + (P2)? Michael's income is m = $10. The price of both goods is p1 = p2 = $1. A11 exogenous shock increases the price of good 1 to 133 = $4, while 192 remains constant. wimm) = 1) Write down (the formula of) Slutsky's equation. 2) Compute m', the income that makes the optimal bundle at p = (1, 1) just afford able at the new price rate p' = (4, 1). 3) Apply Slutsky's equation to derive (Slutsky's) substitution and income effect