Question 4. (6 marks)

Suppose Edouard spends his entire income on two goods, Good x and Good y. His preferences over those goods can be represented by utility function, ux, y xy , where x is the quantity of Good x and y is the quantity of Good y. His current income is $120 per week and the price of Good y is $1 per unit.

a) Find Edouard's optimal bundle when the price of Good x is $2 per unit.

b) Suppose now the price of Good x has increased to $4 per unit. Calculate Edouard's income and substitution effects of this price change.