Answer to Question #138367 in Macroeconomics for James Apollo

Question

Given the following equation U = √X1 X2, decompose the total effect of a price change

when the price of good one reduces by 10% from Ksh. 20. The income of the

consumer is Ksh.5000 per month while the price of good two is Ksh. 30

Answer 1

If the price of good 1 reduces by 10% from Ksh. 20, then the quantity of X1 consumed will increase, and the quantity of X2 consumed will decrease.

But the total effect of a price change will be positive, so the total utility will increase.