Re: Daily question

Posted by Amit Goyal on Feb 15, 2009; 6:39am
URL: http://discussion-forum.276.s1.nabble.com/Daily-question-tp2328964p2328970.html

15 Feb 2009
Pick the correct answer from the options.
a) Indifference curves are downward sloping because:
1) Diminishing Marginal rate of substitution of good x for good y.
2) Marginal Utility from both goods is positive.
3) Marginal utility of one good is positive and other good is negative.
4) Prices of both goods are positive.

Do the following problem:
b) Suppose U=xy. Price of x is Rs. 2 and price of y is Rs. 4 and consumer has Rs.600 to spend. Compute the equilibrium bundle. Now suppose price rise to Rs.4. Decompose the total price effect into Substitution effect and Income effect. (Using both Hicksian and Slutsky methods)