Unformatted text preview: is the relationship between the amount of x and y consumed at the new price level. Suppose these are x1 and y1. But as the decomposition basket remains on the original/initial utility level, x1*y* must be equal to U1, that x1*y1 = U*. You can solve for the values of x and y for the decomposition basket now. If price of x changes, then the difference between final and decomposition basket of x will give the substitution effect and the difference between the final basket and decomposition basket will give you the income effect....
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- Spring '08
- decomposition basket, initial basket