A maximizing consumer with preferences u = x1/2y1/2 has an income of 40 dollars. Prices are...

A maximizing consumer with preferences u = x^1/2y^1/2 has an income of 40 dollars. Prices are p_X = 1 and p_Y = 2. At CostCo the price of good X is p_X = 0.25. Provide an Indifference Curve Diagram to illustrate and quantify the Income Effect and Substitution Effect for this price change. The horizontal intercept of her compensated budget line is equal to _________

Expert Solution

^ from the the compensated budget line derived above,

X-intercept is given by Y = 0
=> 0.25*X = 30
=> X = 120

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Rahul Sunny answered 1 year ago

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