Question

Christina likes only spare ribs, R (measured in slabs), and fried chicken, C (measured in chickens). Her utility function is U = 10RC2.

Christina has $600 income and she pays $5 for a slab of ribs and $10 for a chicken.  

Suppose that the price of ribs increases to $10 per slab with the price of chicken and income constant.  

1. Determine the decomposition basket for the substitution effect due to the change in the price of ribs.
2. Find the numerical values of the income and substitution effects of the change in the price of ribs measured in terms of slabs of ribs.

Answer 1