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 ________________