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 \(= - 1.3\)

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Definitions:

Completed Units

The term refers to items that have been fully manufactured, processed, or finished and are ready for sale.

Equivalent Units

A calculation used in process costing to convert partially completed units into a number of fully completed units.

First-In, First-Out

An inventory valuation method where the first items placed in inventory are the first ones to be used or sold.

Conversion Equivalent Units

A metric used in cost accounting to quantify the amount of work done on partially finished goods, measured in full unit equivalents.