Charlie's utility function is xAxB. The price of apples used to be $1 per unit and...

Charlie's utility function is xAxB. The price of apples used to be $1 per unit and the price of bananas was $2 per unit. His income was $40 per day. If the price of apples increased to $1.25 and the price of bananas fell to $1.25, then in order to be able to just afford his old bundle, Charlie would have to have a daily income of

a. $37.50

b. $76

c. $18.75

d. $56.25

e. $150

In Problem 1, Charlie’s utility function is x_Ax_B. The price of apples used to be $1, the price of bananas used to be $2, and his income used to be $40. If the price of apples increased to $7 and the price of bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his consumption by

a. 6 apples

b. none of the above

c. 13.57 apples

d. 8.57 apples

e. 17.14 apples

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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