Question
In: Economics
1. Imagine you consume two goods, K and L, and your utility function is U =...
1. Imagine you consume two goods, K and L, and your utility function is U = K1/3L2/3. Your budget is $120; PK = $6; PL = $9. So, the optimal bundle for you to consume is (K = 6.6667, L = 8.8889). Now, suppose the price of good K increases to $9. What is the new optimal K for you to consume?
2. Imagine you consume two goods, K and L, and your utility function is U = K1/3L2/3. Your budget is $120; PK = $6; PL = $9. So, the optimal bundle for you to consume is (K = 6.6667, L = 8.8889). Now, suppose the price of good K increases to $9. The compensated price bundle is (K = 5.0976, L = 10.1952). What is the income effect on K?
Solutions
Expert Solution
Answer 1
K = 5.7143, L = 7.619
Asnwer 2) Final demand of K = 5.7143
Compensated price bundle, K = 5.0976
Income effect = 5.7142 - 5.0976 = 0.6166
Rahul Sunny answered 2 years agoRelated Solutions
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