Consider the following utility function U(X,Y) = X^1/4Y^3/4 Initially PX = 2 PY = 4 I...

Consider the following utility function U(X,Y) = X^1/4Y^3/4

Initially
PX = 2

PY = 4

I = 120
Suppose the price of X changes to PX = 3. Perform a decomposition and fill in the table

	X	Y
Substitution Effect
Income Effect
Total Effect

Expert Solution

here the compensatory income I' is :(3×11.061)+(4×24.89)=132.743. This income is obtained by putting the values of good x and good y that the consumer would have bought at unchanged real income after the rise in price of good x. This compensatory income is actually the income that should be given to the consumer so that he can cope up with the rise in price or so that he can keep his utility fixed even after the price rise.

Rahul Sunny answered 2 years ago

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