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A consumer purchases two goods, food (F) and clothing (C). Her utility function is given by...

A consumer purchases two goods, food (F) and clothing (C). Her utility function is given by U(F,C)=FC+F. The marginal utilities are MUF=C+1 and MUC=F. The price of food is PF, the price of clothing is PC, and the consumer’s income is W.

Suppose W=10, Pf=4 and Pc decreases from 6 to 1.5. What is the income effect of clothing?

Solutions

Expert Solution

to find substitution effect, we need to find intermediate bundle which satisfies new utility maximizing condition and gives same utility as initial bundle

to find income effect, substituting the new utility maximizing condition in the new budget constraint

Rahul Sunny answered 2 years ago
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