Q1) Residents of Uurp consume only pork chops (X) and Coca-Cola (V). Utility function for the typical resident or Uurp is given by
Utility « U(X,Y) = √(X - Y)
In 2005, price of pork chops in Uurp was $1 each; Cokes were also $1 each. Typical resident consumed 40 pitrk chopi and 40 Cokes (saving is impossible in Uurp). In 2006, swine fever hit Uurp and pork chop prices rose to $4; rhc Coke price re-mained unchanged. At these new prices, typical Uurp resident Consumed 20 pork chops and 80 Cokes.
a. Illustrate that utility for the typical Uurp resident was unchanged between the 2 years.
b. Illustrate that using 2005 prices would show increase in real income between the 2 years.
c. Illustrate that using 2006 prices would show decrease in real income between the years.
d. What do you conclude about the ability of these indexes ro measure changes in real income?