income and substitution effect problem.

[ashish_kr]

i have solved many times but getting wrong answer....please help

[shiva]

I think substitution effect is zero and income effect is 30, anywayz can you upload your solution. I hope you are aware of the concave utility function and also boundary optimum.

[ashish_kr]

i think my approach is wrong..but with same approch i am getting right answer for u(x,y)=xy

[RichaS]

Your approach is correct, I think 4 should be the answer

[shiva]

Ashish,

The process in which you solved is applicable to convex utility functions, so you got the correct answer when you solved it for u(x,y)=xy

whereas as u(x,y)=(x^2+y^2)^1/2 is a CONCAVE utility functions in which having both (x,y) is not preferable only one of the product is preferred in which case it will have a boundary optimum.

To understand this, plot an indifference curve and the budget equation.

so at this prices px=2 and py = 1, you will have x = 0 and y = 20

whereas at prices px = 0.5 and py = 1, you will have x =40 and y = 0.

[ashish_kr]

can you please upload the complete solution for both hicksian and slutsky approach so that i can learn this concept completely.

[shiva]

[ashish_kr]

thanks