Micro Question

[RichaS]

[RichaS]

His utility in old city was 7499, and utility in the new city will be 7071.
%change in utility= (7499-7071)/7499= 5.7%
 Therefore, income reduced by 5.7%= 15000*0.057= 856
So, A=856, IS THIS ANSWER CORRECT?

[Abhitesh]

If the consumer moves to different city then his income m=15000, p1=1 and p2=2
Now the consumer's problem will be maximise (x1.x2)^1/2 s.t x1+2x2 = m. The solution will be x1=m/2 and x2=m/4.
U=m/2sqrt(2)

If the consumer remains in the same city then his reduced income will be m', and p1=p2=1
Consumer's problem in this case will be maximise (x1.x2)^1/2 s.t x1+x2 = m'. The solution will be x1=x2=m'/2
U'=m'/2

Since U'=U
=> m' = m/sqrt(2) = 10606
Therefore reduction in income = 15000-10606 = 4394.

[RichaS]

Thankyou!