Let U(x,y) = with MU_x = and MU_y

question 25

Multiple Choice

Let U(x,y) = with MU_x = and MU_y = .Let I = $100,P_x = $10 and P_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:

Substitution Effect

The change in the consumption of goods in response to a change in their relative prices, holding the consumer's level of utility constant.

Labor Supply Curve

The graphical representation showing the relationship between the different wage rates and the quantity of labor that workers are willing to supply.

Wage Rate

The amount of compensation a worker receives per unit of time, such as an hour or a week, for their labor.

Backward Bending

A curve, often related to the labor supply, indicating that beyond a certain wage level, as wages increase, individuals may choose to work fewer hours, prioritizing leisure over additional income.