How much additional income does wo fat need

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Reference no: EM132197912

Question: Suppose Wo Fat consumes li hing mui (x1) and cha siu bao (x2) with his income. His utility function over these two goods is:

u(x1, x2) = x1 + 4 log x2

The price of a unit of li hing mui is $3 and the price of a unit of cha siu bao is $1. Wo Fat has a weekly budget of $10 for li hing mui and cha siu bao.

(a) Suppose that the price of cha siu bao increases to $2/unit. Solve for the substitution effect for cha siu bao x2. Demonstrate this effect graphically and show your work analytically.

(b) How much additional income does Wo Fat need, at his new optimal bundle, to maintain the same utility as before the price increase?

Reference no: EM132197912

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