Draw the hick''s income and substitution effects

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Reference no: EM13160368

Imagine that you don't know the utility function but you are told that Jane's preferences over consumption in periods 1 and 2 are monotonic and satisfy diminishing MRS and that both goods are normal. Her income in period 1 is 20 and her income in period 2 is also 20. THe inflation rate is 0.1 and the interest rate is 0.1. You are told that c1*=10 under the conditions described above. Draw the Hick's income and substitution effects for c1,c2 in c1,c2 space if the interest rate decreases to .05.

Reference no: EM13160368

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