Let U(x,y) = $\sqrt { x y }$ With MU_x = $\frac { \sqrt { y } } { 2 \sqrt { x } }$

question 13

Multiple Choice

Let U(x,y) = $\sqrt { x y }$ with MU_x = $\frac { \sqrt { y } } { 2 \sqrt { x } }$ and MU_y = $\frac { \sqrt { x } } { 2 \sqrt { y } }$ . 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

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Definitions:

Marginal Product

The additional output a firm produces as a result of hiring one more unit of a factor of production, such as labor or capital.

Bushel of Wheat

A measure of volume used in the U.S. to quantify agricultural commodities, equivalent to approximately 35.24 liters.

VMPL Curve

A graphical representation showing the value of the marginal product of labor, which changes as more labor is employed.

Technological Advance

The development and application of new technologies or improvements in existing technologies, leading to greater efficiency or new capabilities.