REVIEW QUESTIONS 1.Good 1 is normal, good 2 is normal and the two goods are substitutes (but not perfect substitutes). Using budget lines and indifference curves, illustrate the effect of an increase in p2on the consumption of both x1 and x2. Label income and substitution effects for both goods 2.My utility function is U(x1, x2) = x13x2+ 8 and my utility-maximizing bundle (at existing prices and my income) consists of 3 units of x1and 2 units of x2. If p1 = 10, what must p2 equal? 3.A consumer has preferences over leisure, Le, and disposable income, I. Use budget lines and indifference curves to illustrate the case where a simultaneous halvng of the wage rate and a doubling of non-wage income would have no effect on her optimal choice of disposable income. 4.a. Using indifference curves and budget lines in the (c1, c2) plane, illustrate a situation in which an increase in the interest rate, r, causes someone who was originally savingto save less.
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