1. (3 pts.) On the graph below break down the change resulting from the increas

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 = X0.5Y 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 ________________

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