Compute the equivalent and compensating variations

Reference no: EM133714302

Question: A consumer with perfect substitute utility u(x) = 3x; + 2x, who once faced prices p° = (4,2) goes through a dramatic decrease in the price of good 1 such that it's price is cut in half overnight. (a) Illustrate, with clearly labeled axes and intercepts, the substitution effect and income effects of this price change. Express these values as functions of a generic income I. (b) Now suppose the consumer's income during this time is I = 2400. Compute the equivalent and compensating variations of this change.

Reference no: EM133714302

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