Bilal’s utility function is U(x1; x2) = x1x2 (assume x1 and x2 are normal goods). The...

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.

Solutions

Expert Solution

Rahul Sunny answered 1 week ago

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