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An individual, who has income I, cares only about two goods: X and Y. Their prices are Px and Py, respectively. The individual's utility function is U(X,Y)=aln(X)+(1-a)ln(Y). Suppose that initially I=50 and Px=Py=5. Later, there is a change in Py such that the new (lower) price for Y is Py=1. find out the total effect on the consumption of Y produced by this drop in the price of Y. Also, find out the substitution effect and the income effect.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938319

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