# Quiz 6 - X = M/2P X and Y = M/2P Y X = M/8 and Y = M/50....

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Econ 302 Quiz 6 McLeod Name _____________________________ ID # _________________________________ 1. Suppose a consumer’s utility function is given by U(X,Y) = X*Y. Also, the consumer has \$1800 to spend, and the price of X, P X = 9, and the price of Y, P Y = 25. a) (4 points) How much X and Y should the consumer purchase in order to maximize her utility? X = 100; Y = 36 b) (4 points) How much total utility does the consumer receive? U = X*Y = 3600 c) (4 points) Now suppose P X decreases to 4. What is the new bundle of X and Y that the consumer will demand? X = 225; Y = 36 d) (4 points) How much money would the consumer need in order to have the same utility level after the price change as before the price change?

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Unformatted text preview: X = M/2P X and Y = M/2P Y X = M/8 and Y = M/50. Since we are holding the consumers utility constant at its original level (U = 3600), X*Y = 3600. Therefore (M/8)*(M/50) = 3600. Solving for M, we get M= 1200 . e) (4 points) Of the total change in the quantity demanded of X, how much is due to the substitution effect and how much is due to the income effect? When M = 1200, X = 150, and Y = 24. Therefore, the change in quantity demanded of X due to the Substitution Effect is 50 (X goes from 100 150), and the change in the quantity demanded of X due to the Income Effect is 75 (X goes from 150 225). SE: 50 IE: 75...
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## This note was uploaded on 12/18/2008 for the course ECON 302 taught by Professor Kurrejamesantho during the Fall '08 term at Pennsylvania State University, University Park.

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Quiz 6 - X = M/2P X and Y = M/2P Y X = M/8 and Y = M/50....

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