Text: Suppose the utility function of the consumer is u(x1,x2)=min{x1,x2}. Further, suppose p1=$4, p2=$2 and I=$18. Based on this information, answer the following questions (questions 16-25).

Questions:

16. What is the optimal quantity of good 1 chosen by the consumer?

17. What is the optimal quantity of good 2 chosen by the consumer?

18. What is the optimal quantity of good 1 chosen by the consumer if p1 decreases to $1?

19. What is the optimal quantity of good 2 chosen by the consumer if p1 decreases to $1?

20. What is the size of the substitution effect for good 1 when p1 decreases from $4 to $1? [Hint: for questions 20-23, you cannot use the mathematical approach developed in lecture and tutorial 5 to find the substitution and income effects. Applying here the graphical analysis of income and substitution effects should give you an idea of how to answer the question.]

21. What is the size of the income effect for good 1 when p1 decreases from $4 to $1?

22. What is the size of the substitution effect for good 2 when p1 decreases from $4 to $1?

23. What is the size of the income effect for good 2 when p1 decreases from $4 to $1?

24. Given your analysis of the income and substitution effects for good 1, you can conclude that for this consumer good 1 is:

a. A normal good

b. An inferior good

c. A quasi-linear good

d. A Giffen good.

25. Given your analysis of the income and substitution effects for good 2, you can conclude that for this consumer good 2 is:

a. A normal good

b. An inferior good

c. A quasi-linear good

d. A Giffen good