Eric has the utility function U(x, y) = x0.5y0.5, where x denotes the amount of food...

Eric has the utility function U(x, y) = x^0.5y^0.5, where x denotes the amount of food consumed and y the amount of clothing. Now suppose that he has an income of $80 per week and that the price of clothing is P_y = $2 per unit. Suppose that the price of food is initially P_x₁ = $2 per unit and that the price subsequently increases to P_x₂ = $8 per unit.

Suppose the initial consumption basket, when the price of food is $2, is A. When the price of food is $8, Eric buys ? units of x. The price effect is ? units of food. At the initial basket A, Eric’s utility is ? . At the decomposition basket, B, Eric gets the utility equals the initial basket A. Basket B contains ? units of x. The substitution effect is, therefore, ? units of food, and the income effect is ? units of food. At the final basket, Eric’s utility is ?.

Expert Solution

I have tried to answer. But, I think there is a problem with the qusetion since on solving the decomposition basket, the y and x values cannot be found as the quadratic equation is showing no real roots. I have explained how to approach this question further via appropriate formulae. I hope this helps. Please don't forget to upvote.

Rahul Sunny answered 11 months ago

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