Let $\mathrm { U } ( \mathrm { x } , \mathrm { y } ) = \sqrt { x y }$

question 62

Multiple Choice

Let $\mathrm { U } ( \mathrm { x } , \mathrm { y } ) = \sqrt { x y }$ with $\mathrm { MU } _ { \mathrm { x } } = \frac { \sqrt { y } } { 2 \sqrt { x } }$ and $\mathrm { MU } _ { \mathrm { y } } = \frac { \sqrt { x } } { 2 \sqrt { y } }$ . Let $\mathrm { I } = \$ 100 , \mathrm { P } _ { \mathrm { x } } = \$ 10$ and $\mathrm { P } _ { \mathrm { y } } = \$ 10$ be the initial set of prices and income. Now, let $P _ { x }$ rise to $\$ 25$ . What are the (approximate) substitution and income effects of this change in prices?

• A) Income effect \(= - 3.3\); Substitution Effect \(= - 2.1\)
• B) Income effect \(= - 2.3\); Substitution Effect \(= - 1.7\)
• C) Income effect \(= - 1.3\); Substitution Effect \(= - 1.7\)
• D) Income effect \(= - 1.7\); Substitution Effect \(= - 1.3\)

---

Definitions:

Poverty Level

A set income threshold below which individuals or families are considered to be lacking the financial resources to meet basic living expenses.

Federal Government

The national government of a federated state, which holds the authority to enact and enforce laws applicable to the entire country.

Educational Consequence

The positive or negative outcomes resulting from an individual's educational experiences or lack thereof.

Homelessness

The state of having no permanent residence, often resulting in living on the streets, in shelters, or in temporary accommodations.