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Question 1 (a) Consider a consumer who consumes 2 goods, x, and xy. Graphically illustrate the income and substitution effect of a price increase in a good. What assumptions did you need to make here? (b) A student eats only donuts (x,) and oatmeal (x2) for breakfast. Their preferences are described by U[xx, xx)=2x, + xy. If the student's income is $20 and the price of donuts and oatmeal are $4 and $1, respectively, the student consumes 1 donut and 16 oatmeals, achieving a utility of 18. If the price of donuts decreases to $2, calculate the compensating and equivalent variation. (Hint: What do we know about CV and EV when we have this specific type of preference?)

          Question 1 (a) Consider a consumer who consumes 2 goods, x, and xy. Graphically illustrate the income and substitution effect of a price increase in a good. What assumptions did you need to make here? 
(b) A student eats only donuts (x,) and oatmeal (x2) for breakfast. Their preferences are described by U[xx, xx)=2x, + xy. If the student's income is $20 and the price of donuts and oatmeal are $4 and $1, respectively, the student consumes 1 donut and 16 oatmeals, achieving a utility of 18. If the price of donuts decreases to $2, calculate the compensating and equivalent variation. (Hint: What do we know about CV and EV when we have this specific type of preference?)

Added by Daniel B.

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