Suppose a consumer's demand for good 1 is given by x1(p1,p2,m) = m/(2(p1 + p2), and she spends all her income on these two goods.
(a) Find the consumer's demand for good 2. Now, let the initial prices be p1 = 2 and p2 = 2, and let m = 48. Suppose the price of good 1 drops to p1 = 1.
(b) Is good 1 a normal good or inferior good? Ordinary or Giffen? Is good 2 a complement or substitute for good 1?
(c) Are the consumer's preferences homothetic?
(d) Calculate the change in the consumption of good 1 due to the income effect and substitution effect.