Question 1

Suppose a consumer's utility function is U=X^{0.5}Y^{0.5} with marginal utilities of MUx=0.5X^{-0.5}Y^{0.5} and MUy=0.5X^{0.5}Y^{-0.5}. They have an income of 32 to purchase goods X and Y. Round answers to one decimal place.

1) What is the consumer's optimal bundle when the price of X is 2 and the price of Y is 2?

2) What is the consumer's optimal bundle when the price of X is 8 and the price of Y is 2?

3) Using your intuition for standard preferences, what are the signs of the income and substitution effects from the price change?

4) What are the values of the income and substitution effects using the decomposition bundle technique?

5) Does your intuition in 3) match the values in 4)?

Score = 0