QUESTION 5

U(x,y) = x0.5y0.5, and budget line is 400=10x+20y

a. What is the optimal bundle of x and y?

i.Optimal Good x:

ii. Optimal Good y:

b. Suppose the price of good x falls to $6, what is the new optimal bundle?

i.Optimal Good x:

ii. Optimal Good y:

c. What is the total effect (on good x) of the price decrease?

QUESTION 6

Based on the information in question 5 and your answers for that question, calculate the substitution effect (on good x) of the price decrease.________

QUESTION 7

Based on the information in question 5 and your answers for that question, calculate the income effect (on good x) of the price decrease. If you answer is negative DO NOT put the negative sign in front of your answer.. ______

QUESTION 8

Based on your answers in questions 5, 6 and 7, is good x a normal good or inferior good?

a.Inferior Good

b.Normal Good