Explain how much of x1 and x2 will fred consume

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Reference no: EM1362039

0502 Fred consumes only two goods X1 & X2 and utility function U=X1X2. Fred's only source of income is from his inheritance in which he has 100 units of X1 AND 200 units of X2. ferd can always byu or sell X1 at priceP1=1
and X2 at price P2=2

1)calculate fred's gross demand and net demand for X1 & X2

2)Soppose that before Fred has made any trade, the perice of X2 fall to 1, and the price of X1 is unchanged at $1. what happen to Fred's optimal consumption of X1 & X2

3)Suppose that before the price of X2 fell, Fred had exchanged all of his inheritance of X1 and X2 for money, planning to use the money to finance his purchases later, how much of X1 & X2 will Fred consume after P2 fell to 1?

4)by comparing your answer in part(2)and(3), explain why Fred's consumption is different depending on wether he was holding goods or money at the time of price change

Reference no: EM1362039

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