In: Economics
Bilal’s utility function is U(x1; x2) = x1x2 (assume x1 and x2 are normal goods). The price of good 1 is P1, the price of good 2 is
P2, and his income is $m a day. The price of good 1 suddenly falls.
(a)Represent, using a clearly labelled diagram, the hicks substitution effect, the income effect and the total effect on the
demand of good 1.
(b) On a separate diagram, represent using a clearly labelled diagram, the slutsky substitution effect on the demand of x1
and explain how is it different from the hicks substitution effect.