Calculate income effect-substitution effect and total effect

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Reference no: EM131166377

Consider a market with two goods, x and z that has the following utility function

U = (x^.8)(z^.2)

a. What is the marginal rate of substitution

b. As a function of the price of good x (px), the price of good z (pz) and the income level (Y), derive the demand functions for goods x and z

c. Suppose px=4, pz=2 and Y=50. What is the optimal bundle consumed?

d. Suppose the price of good x increases to px=8. Now what is optimal bundle?

e. Calculate the decomposition bundle associated with price change

f. Calculate the income effect, substitution effect and total effect

Reference no: EM131166377

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