Question

1. Suppose that a consumer has a utility function U(x1, x2) = x 0.5 1 x...

1. Suppose that a consumer has a utility function U(x1, x2) = x 0.5 1 x 0.5 2 . Initial prices are p1 = 1 and p2 = 1, and income is m = 100. Now, the price of good 1 increases to 2.

(a) On the graph, please show initial choice (in black), new choice (in blue), compensating variation (in green) and equivalent variation (in red).

(b) What is amount of the compensating variation? How to interpret it?

(c) What is amount of the equivalent variation? How to interpret it?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
3. Suppose that a consumer has a utility function u(x1, x2) = x1 + x2. Initially...
3. Suppose that a consumer has a utility function u(x1, x2) = x1 + x2. Initially the consumer faces prices (1, 2) and has income 10. If the prices change to (4, 2), calculate the compensating and equivalent variations. [Hint: find their initial optimal consumption of the two goods, and then after the price increase. Then show this graphically.] please do step by step and show the graph
The utility function is given by u (x1,x2) = x1^0.5 + x2^0.5 1) Find the marginal...
The utility function is given by u (x1,x2) = x1^0.5 + x2^0.5 1) Find the marginal rate of substitution (MRSx1,x2 ) 2) Derive the demand functions x1(p1,p2,m) and x2(p1, p2,m) by using the method of Lagrange.
The utility function is given by u (x1, x2) = x1^0.5+x2^0.5 1) Find the marginal rate...
The utility function is given by u (x1, x2) = x1^0.5+x2^0.5 1) Find the marginal rate of substitution (MRSx1,x2 ) 2) Derive the demand functions x1(p1, p2, m) and x2(p1,p2, m) by using the method of Lagrange.
Consider the following utility function: U(x1,x2) X11/3 X2 Suppose a consumer with the above utility function...
Consider the following utility function: U(x1,x2) X11/3 X2 Suppose a consumer with the above utility function faces prices p1 = 2 and p2 = 3 and he has an income m = 12. What’s his optimal bundle to consume?
2. A consumer has the utility function U ( X1, X2 ) = X1 + X2...
2. A consumer has the utility function U ( X1, X2 ) = X1 + X2 + X1X2 and the budget constraint P1X1 + P2X2 = M , where M is income, and P1 and P2 are the prices of the two goods. . a. Find the consumer’s marginal rate of substitution (MRS) between the two goods. b. Use the condition (MRS = price ratio) and the budget constraint to find the demand functions for the two goods. c. Are...
7. Suppose you have the following utility function for two goods: u(x1, x2) = x 1/3...
7. Suppose you have the following utility function for two goods: u(x1, x2) = x 1/3 1 x 2/3 2 . Suppose your initial income is I, and prices are p1 and p2. (a) Suppose I = 400, p1 = 2.5, and p2 = 5. Solve for the optimal bundle. Graph the budget constraint with x1 on the horizontal axis, and the indifference curve for that bundle. Label all relevant points (b) Suppose I = 600, p1 = 2.5, and...
The utility function and the prices are the following: U = 39 x1 + 6 x2...
The utility function and the prices are the following: U = 39 x1 + 6 x2 P1=8,   P2=33 and I =6,657 What is the amount of maximized utility?
Suppose x1 and x2 are perfect substitutes with the utility function U(x1, x2) = 2x1 +...
Suppose x1 and x2 are perfect substitutes with the utility function U(x1, x2) = 2x1 + 6x2. If p1 = 1, p2 = 2, and income m = 10, what it the optimal bundle (x1*, x2*)?
1. A consumer has an utility function given by U(x1, x2) = ? log(x1) + (1...
1. A consumer has an utility function given by U(x1, x2) = ? log(x1) + (1 ? ?) log(x2), with0<?<1. HerincomeisgivenbyM,andthepricesshefacesarep1 andp2, respectively. What is the optimal choice of x1 and x2? Follow the steps outlined in the math refresher notes. How does this result compare to the one in the notes? Explain.
Consider utility function u(x1,x2) =1/4x12 +1/9x22. Suppose the prices of good 1 and good 2 are...
Consider utility function u(x1,x2) =1/4x12 +1/9x22. Suppose the prices of good 1 and good 2 are p1 andp2, and income is m. Do bundles (2, 9) and (4, radical54) lie on the same indifference curve? Evaluate the marginal rate of substitution at (x1,x2) = (8, 9). Does this utility function represent convexpreferences? Would bundle (x1,x2) satisfying (1) MU1/MU2 =p1/p2 and (2) p1x1 + p2x2 =m be an optimal choice? (hint: what does an indifference curve look like?)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT