A consumer has the following utility function ?(?, ?) = ?^0.2 ?^0.8 and Income=$800, Px =2,...

A consumer has the following utility function ?(?, ?) = ?^0.2 ?^0.8

and Income=$800, Px =2, Py =4
Note that ??? = 0.20 (y/x)^0.80 and ??? = 0.8 (x/y)^0.20

a) Find the initial equilibrium (x, y, U)
b) Assume that Px increases by 20% and Py decreases by the same percentage.

Find the new equilibrium (x, y, U).
c) Find the income and substitution effects of the above price changes.

Expert Solution

Rahul Sunny answered 1 year ago

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