John’s utility function is given by the following equation ?(?, ?) = min(2?, 5?), where x...

John’s utility function is given by the following equation

?(?, ?) = min(2?, 5?),

where x is the unit of good X consumed, and y is the unit of good Y consumed. John’s budget is $140, price of good X (? ) is $3, and price of good Y (? ) is $10. Show all the steps, with definition of every new notation used in the steps.

a) What is John’s optimal consumption (?∗, ?∗)? Graph the optimal consumption along with appropriate budget line and indifference curve. (7 pts.)
b) If ? decreases from $3 to $2, what is the new optimal consumption (? , ? )? Graph the new optimal ???

consumption along with appropriate budget line and indifference curve on part a)’s graph. (7 pts.)
c) If ? decreases from $3 to $2 what is the substitution effect and income effect in terms of good X? (5 pts.) ?

Solutions

Expert Solution

Rahul Sunny answered 2 years ago

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