Income adjustment, To maintain utility constant an income

Income adjustment

Reference no: EM131618

Question:

In November 2010, each and every Mzumbe University student had an income of 150000/= per month, facing the price of meal (X) 1000/= and average price of goods (Y) 1000/=. The initial utility maximizing quantities were, (X,Y): (75,75). In July 2011, the price of meal increased to 1500/= while the average price of goods remained unchanged. The new utility maximizing quantities were (50,75). Attempt the given questions.

(a) To maintain utility constant an income adjustment brought the student to consume the basket (61,92). What are substitution effects and the income ?

(b) Suppose the objective is to maintain purchasing power constant. Will utility be maximixed?

(c) In October 2011,the Higher Education Student's Loan Board (HESLB) increased the allowance to 7500/= per day. Is this amount worth?

The computation are on the basis of utility function U = X^0.5Y^0.5

Reference no: EM131618

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