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Derive the optimal consumption bundle

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Reference no: EM132414833

Consider the utility function u(x1, x2) = x1x2. Initially p1 = $1 and p2 = $2. Income is $ 15.

  1. Derive the optimal consumption bundle.
  2. If the price of good 1 doubles to $ 2, derive the new consumption bundle.
  3. Decompose the the change in consumption of good 1 into the income and substitution effect, and illustrate your answer with a graph.
  4. Compute the Compensation variation (CV) and the Equivalent Variation (EV).

Reference no: EM132414833

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