Suppose prices were p1 p2 1 and income was 10 in the next, Business Economics

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Suppose prices were p1 p2 1 and income was 10 in the next

Suppose prices were p1 = p2 = 1 and income was 10. In the next year the price of good 1 doubled. The price of good 2 stayed the same. Calculate the CPI income adjustment. Calculate the new optimal bundle. And lastly, calculate the amount of the substitution bias. By how much is the consumer better off as a result of CPI adjustment relative to his utility before the price change? (Please show the diagram as well.)

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Business Economics: Suppose prices were p1 p2 1 and income was 10 in the next

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