How much of the change in mr smiths consumption of x

Reference no: EM13243439

Mr. Smith has a weekly income of M = $24. Initially the prices of Xand Y are both $2/unit and Mr. Smith buys 6 units each of X and Yeach week, a bundle on indifference curve I0. Then, ceterisparibus, the price of X increases to $4/unit, with the result thatMr. Smith now buys 3 units of X and 6 units of Y per week, which isa bundle on indifference curve I1. It is also the case that, if Mr.Smith's income were $34 a week after the price increase (itisn't, but if it were...) he would buy 4 units of X and 9units of Y, which is a bundle on indifference curve I0 ($34 is theminimum income required for Mr. Smith to attain his initialindifference curve after the price increase).

How much of the change in Mr. Smith's consumption of X, as aresult of the increase in the price of X, is due to thesubstitution effect? How much of the change in Mr. Smith'sconsumption of X is due to the income effect?

Reference no: EM13243439

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