(a) Let x1 and x2 be normal goods. Graphically, represent the effect of an increase in...

(a) Let x1 and x2 be normal goods. Graphically, represent the effect of an increase in the price level of x2. Show the Slutsky substitution and income effects on a clearly labelled diagram. (b) On a separate graph, show what would happen if x2 is now a Giffen good. Show the (Slutsky) substitution and income effects clearly and explain which effect outweighs the other. Note: For both parts x1 should be on the x-axis Assume the utility function to be a cobb Douglas function. Please note that you need to draw indifference curves to represent the optimal bundles.

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Rahul Sunny answered 7 months ago

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(a) Let x1 and x2 be normal goods. Graphically, represent the effect of an increase in...

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