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Assume that Sam has following utility function: U(x,y) = 2√x+y MRS=(x)^-1/2, px = 1/5, py =...

Assume that Sam has following utility function: U(x,y) = 2√x+y

MRS=(x)^-1/2, px = 1/5, py = 1 and her income I = 10. price increase for the good x from px = 1/5 to p0x = 1/2.

(a) Consider a price increase for the good x from px = 1/5 to p0x = 1/2. Find new optimal bundle under new price using a graph that shows the change in budget set and the change in optimal bundle when the price increases.

(b) Describe three different measures to evaluate welfare change from a price change.

(c) Following (a), show that these three measures are the same using a graph (or an algebra).

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Answer #1

Part a) graph

Red color IC: when original price

Blue: new IC after price change

Green colour BC: original price, equilibrium ( 25,5)

Purple colour, new BC, eqm :(4,8)

Part c) using algebra:

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