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Bilal’s utility function is U(x1; x2) = x1x2 (assume x1 and x2 are normal goods). The...

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Economics

Bilal’s utility function is U(x1; x2) = x1x2(assume x1 and x2 are normal goods). The price of good 1 is P1, theprice of good 2 is

P2, and his income is $m a day. The price of good 1 suddenlyfalls.

(a)Represent, using a clearly labelled diagram, the hickssubstitution effect, the income effect and the total effect onthe

demand of good 1.

(b) On a separate diagram, represent using a clearly labelleddiagram, the slutsky substitution effect on thedemand of x1

and explain how is it different from the hicks substitutioneffect.

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