Question

Alice’s preferences over two goods are described by the utility function u(x1, x2) = 2x1+ 4x2....

Alice’s preferences over two goods are described by the utility function u(x1, x2) = 2x1+ 4x2. Her income is m= 100 and p1= 4, p2= 5. Assume now that the price of good 1 falls to p01= 2.

a) Find the substitution, income, and total effect for good 1.

b) Find the substitution, income, and total effect for good 2.

c) Verify that the Slutsky equation holds for both goods

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