Consider the utility function, U(x,y) = ln(x) + y. Please answer the following questions, showing all...

Consider the utility function, U(x,y) = ln(x) + y. Please answer the following questions, showing all work. (1) Derive an expression showing the overall effect of an increase in py on the quantity of y consumed, holding constant px and income (I). (2) Now, show how that overall effect in (1) can be decomposed into a separate substitution effect and income effect. Show these effects explicitly. (3) Now, do the same for x: derive an expression showing the overall effect of an increase in px on the quantity of x consumed, holding constant py and income (I). Explain why the decomposition of this overall effect into a substitution and income effect is comparatively simple.

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Rahul Sunny answered 1 year ago

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