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Stutsky decomposition: A consumer has u = (a) Solve for the consumer's demands for good 1 and 2 as a function of income, AI, and
Stutsky decomposition: A consumer has u = (a) Solve for the consumer's demands for good 1 and 2 as a function of income, AI, and prices Pi and p2 using the MIRS and the budget line. (b) Suppose AI = 60. p1 = substitution and income effects of this price change. and show these effects on a clear complete graph. 2 and p2 = 1 but then P falls to 1. For good 1 compute the (c) Does the substitution effect have to be positive for any Cobb-Douglas utility function? Explain.
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