In the November 2010, every Mzumbe University student had an income of 150000/= per month, facing the price of the meal (X) 1000/= and average price of the other goods (Y) 1000/=.The initial utility maximizing quantities were, (X, Y): (75, 75). In July 2011, the price of meal raised to 1500/= while the average price of other goods remained unaffected. The new utility maximizing quantities were (50, 75). Attempt the subsequent problems.
(a) To maintain utility stable an income adjustment brought the student to consume basket (61, 92). What are the income and substitution effects?
(b) Assume the objective is to maintain purchasing power stable. Will utility be maximized?
(c) In October 2011, the Higher Education Student’s Loan Board (HESLB) raised the allowance to 7500/= per day. Is this amount worth?
The computation are on the basis of utility function U = X^0.5Y^0.5