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Consider a consumer whose preferences can be represented by the utility function u(x, y) = x + y

(a) Originally, px = 1, py = 2 and m = 1. What bundle does the consumer choose,

and what is his utility from this bundle?

(b) The price of good x then rises to 3. What bundle does the consumer choose after the price change, and what is his utility from this bundle?

(c) Calculate the compensating variation. (Hint: at the new price ratio, what good will he spend his income on?)

(d) Calculate the equivalent variation.

 

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