Question

Part 1. Calculate the elasticity of substitution between ? and ? for ?(?,?) = 10?^2 +...

Part 1. Calculate the elasticity of substitution between ? and ? for ?(?,?) = 10?^2 + 15?^2.

Part 2. Prove that the CES (production) function, ?(?,?) = ?(??^−? + ??^−?)^−1/? , is homogeneous of degree ? = 1.

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Answer #1

The elasticity of Substitution:

Measures the percentage change in the ratio of the consumption of good y to consumption of good x from a percentage change in the price ratio.

= (dY/dP) P/Y

where Y = y/x (ratio of the consumption of good y to the consumption of good x)

P = px/py ( the price ratio)Thank you.

  

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