I am trying to calculate substitution and income effect for 2 goods, x and y.
Given that marginal utility x = 1, marginal utility y = -a (unknown number), price of x = 16, price of y = 20, how should I proceed? I am unable to use the equal marginal principle, since I cannot have a negative price. But without using the marginal principle, I am also unable to find the optimal basket.
I was also considering that the marginal rate of substitution of x will always be greater than that of y. Hence, the optimal basket would just be to spend all the income on x. Could that count as an optimal basket?