these are both standard questions and the relevent methods should be in any undergraduate microeconomics textbook. How far can you get?
Hi guys,
Once again im stuck with answering this question. Any kind of help would be much appreciated
Question:
David is confused. He has a limited income that he must allocate between his two favourite goods, A and B. David’s utility function for these goods is given by:
U(A,B)=4A+4B.
The price of good A is currently $6 and the price of B is currently $4.
a) David’s income is equal to $36. How much of A and B will he consume? Explain and carefully demonstrate David’s optimal choice on a graph.
b) Suppose that price of good B increases from $4 to $5. What is the total effect of this price change on Davis’s demand for goods A and B? What are the corresponding income and substitution effects? Explain and demonstrate your answer on a graph
Thanks heaps guys!