1. (89 points) Elasticity, Slutsky, compensating and equivalent variations Ike has utility function u(x1,x2)=x1x2 where x1 and x2 are his consumptions of goods 1 and 2, respectively. He has a budget m to spend entirely on goods 1 and 2 who's prices are p1 and p2. a) (4 points) Compute Ike's ordinary demand for good 1 and 2: x1(p1,p2,m),x2(p1,p2,m). Show the main steps. (note, make sure this is correct as it will be used extensively in the following exercises). b) (6 points) Compute Ike's i) own-price point elasticity of demand of good 1(1,1), ii) cross-price point elasticity of demand for good 2 with respect to the price of good 1 (1,2), iii) income point elasticity of demand of good 1 (label it 1 ). Use derivative for your calculations. Simplify as much as possible. Note: use derivatives. c) (5 points) Only based on your previous calculations at b), what do you conclude about the nature of goods 1 and 2 (ordinary / normal / inferior / Giffen / luxury / complement / substitute). Say as much as possible. d) (2 points) Ike's budget is m=8 and the initial prices of goods 1 and 2 are p1=2, p2=2. How much is Ike consuming of good 1 and good 2? Label this initial consumption bundle (x1A,x2A) e) (2 points) If the price of good 1 doubles to p1=4, what is Ike's new consumption bundle? Note it (x1B,x2B)..