Question
Suppose the utility is given by U = square root x + square root y (where x and y denote quantities, the prices of x
Suppose the utility is given by U = square root x + square root y (where x and y denote quantities, the prices of x and y are Px=Py=1 and income I=12.
The optimal bundle has a quantity of 6 at x.
The optimal bundle has a quantity of 6 at y.
Good x undergoes a price shock where Px=2.
Consider the optimal bundle after applying the substitution effect, but before the income effect:
The optimal bundle after the substitution effect has what quantity of x?
The optimal bundle after the substitution effect has what quantity of y?
*note substitution effect is always negative
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