Question: Pat divides a $900 monthly income between the consumption of food (X) and all else (Y). Pat’s preferences can be described by the following utility function: U=XY.

a) If the price of food is $1, and all else is $2, how much of each good will Pat choose?

b) If now the price of food rises to $2, how much of each will Pat choose?

c) Explain this change in terms of incoMeand substitution effects

d) How much would Pat be willing to pay to avoid this price increase?