Question: Suppose the utility function for Linda is given by u(x1, x2) = log x1 + x2
and her budget constraint is given by p1x2 + p2x2 = m
(a) Derive the demand function for Linda for both goods. (Hint: the demand of any good can not be negative!)
(b) Write down the inverse demand function for good 1 when p2 = 1 and m = 5.
(c) Suppose her income increases to m' but all the prices remains the same. What happens to her demand for good 1?
(d) Now suppose her income is still m but price of good 1 has gone up to p^1 , show the Slutsky decomposition of substitution and income effect in a diagram in the x1- x2 plane. Label the two axes and all curves properly. Show all directions of the movement of consumption bundles.