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