1. (3 pts.) On the graph below, break down the change resulting from the increase in the price of…

1. (3 pts.) On the graph below, break down the change resulting from the increase in the price of X into income and
substitution effects. Note that in this case there is an increase in the price of X.

Is X a normal or inferior good? _______________________
2. (3 pts.) On the graph below, break down the change resulting from the increase in the price of X into income and
substitution effects. Note that in this case there is a decrease in the price of X.

What kind of goods are these? __________________ _________
3. (4 pts.) If U = X0.5
Y, I = 120, PX= 4, and PY=20, find the utility-maximizing combination of X and Y using the Lagrangian
multiplier. Also find the MRS and the ratio of the prices at the utility-maximizing combination. Show your work on a
separate page.

a. Units of X_________________ b. Units of Y_______________
c. MRS ___________________ d. Px/Py ________________