Question

He optimal amount of x1, x2, P1, P2 and income are given by the following:

x subscript 1 equal fraction numerator 2 I over denominator 7 P subscript 1 end fraction space space space space space space space space space space x subscript 2 equal fraction numerator 5 I over denominator 7 P subscript 2 end fraction
The original prices are: P1=19 P2=19
The original income is: I =2,592
The new price of P1 is the following: P1'=41
Assume that the price of x1 has changed from P1 to P1'. What is the income effect?

Answer 1

Income effect = 20.92

Step-by-step explanation:

X1 = 2I / 7P1

X1 = (2*2,592) / (7*19) = 5,184 / 133

X1 = 38.98

P1 changes to P1’ and P1’ = 41

New X1 = 2I / 7P1’

New X1 = (2*2,592) / (7*41) = 5,184 / 287

New X1 = 18.06

So, change in X1 = 38.98 - 18.06

Income effect = 20.92

Hope this helps!