In: Economics
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 xAxB. 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