Question

Consider the utility function U ( x,y ) = min { x , 2y }. (a)...

Consider the utility function U ( x,y ) = min { x , 2y }.

(a) Find the optimal consumption choices of x and y when I=50, px=10, and py=5.

(b) The formula for own-price elasticity of x is εx,px = (−2px/2px + py) For these specific values of income, prices, x and y, what is the own-price elasticity? What does this value tell us about x?

(c) The formula for cross-price elasticity of x is εx,py = (py/2px + py) Calculate the cross-price elasticity of x for these specific values of income and prices. What does this number tell us about x and y?

(d) The income elasticity of demand is equal to 1. What does this tell us about x?

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