Substitution effect of the price change, Macroeconomics

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Substitution effect of the price change

Suppose that Ella has a demand function for milk of the form: X1=10+m/(10P1) where her income is originally $120 per week and the price of milk (P1) is $3 per litre. 1p

a. What is Ella's demand for milk (in litres)?

Suppose that the price of milk now falls to $2 per litre.

b. Calculate the substitution effect of the price change.

c. Calculate the income effect of the price change.

d. What is the overall effect on Ella's demand for milk?

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Macroeconomics: Substitution effect of the price change

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Macroeconomics: Substitution effect of the price change

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Macroeconomics: Substitution effect of the price change

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