I was given information of a consumer that initially consumed 4 units of both good x and good y with the initial price of $5 for both goods (px = py = 5).

The initial budget constraint is 40 = 5x +5y

Then the price of x increases by 1 and the price of y falls by 1.

The question is to Compared with the initial situation, what can you say about the substitution and income effects of the simultaneous change in two prices in (i) on the amounts consumed of each of x and y?

I have drawn the budget constraint graph, yet no other information about utility or MRS is given in order to calculate other points.

How do I go about calculating the substitution and income effect without the other bundles?

Is there a way to calculate other bundles?

Thank you in advance

I have drawn the budget constraint graph

  • 2
    $\begingroup$ The question has the telltale phrase "what can you say" (about the substitution and income effects). This implies it is possible the exact numbers are not calculable, but you may be able to say something about their sign or range. $\endgroup$ – Giskard Apr 17 at 8:30
  • $\begingroup$ thank you, I got it now. $\endgroup$ – grace Apr 17 at 21:16
  • $\begingroup$ One point is that $(4,4)$ is at the intersection of the two budget constraints in this case (your arrow does not make this clear to me), so utility cannot fall under the new pricing regime $\endgroup$ – Henry Apr 19 at 10:30

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