Calculate the income effect of the price change

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Reference no: EM132200935

Question: A consumer has the utility function U(x,y) = αln x + ln y.

a) Find the Marshallian and Hicksian demand functions

b) Set α=2, Px=2, Py=1 and I = 30. Find the best bundle that the consumer can afford. Illustrate the best bundle in an indifference curve diagram.

c) Lower Px to 1. Find the new best bundle and illustrate the new bundle and budget line in your diagram.

d) Use your Hicksian demands to calculate the substitution effect of the price change.

e) Calculate the income effect of the price change.

f) Verify that the Slutsky equation holds for your demand functions. You need only verify it for the own price derivative of x and the cross price derivative of y.

Reference no: EM132200935

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