Presume a person has $80 to spend only on two products: x and y. X cost $4 each, and Y cost $1 each. This person has preferences for X and Y given by
Utility =?XY
1. What is the utility-maximization bundle of this person?
2. Sketch his indifference budget and curve line to illustrate the point you found in previous question.
3. Presume the price for X increases to $5 each. What is the new bundle of X and Y as a result of income effect?
4. From the previous part, what is the bundle this person will arrive at if the substitution effect takes place? It must be note here that 5=2.236
5. Use a graph to illustrate the three bundles you have found. You graph must contain two indifference curves and two budget lines.
6. Draw a demand curve of product X