Question

Assume that we have following utility maximization problem with quasilinear utility function: U=2√ x + Y...

Assume that we have following utility maximization problem with quasilinear utility function:

U=2√ x + Y

s.t. pxX+pyY=I

(a)derive Marshallian demand and show if x is a normal good, or inferior good, or neither

(b)assume that px=0.5, py=1, and I =10. Then the price x declined to 0.2. Use Hicksian demand function and expenditure function to calculate compensating variation.

(c)use hicksian demand function and expenditure function to calculate equivalent variation

(e) briefly explain why compensating variation and equivalent variation are the same in this case.

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Answer #1

E) in case of quasi linear preferences, CV = EV.

The IC are always parallel .

Since hicksian & marshallian demand functions are equal, so in case of quasilinear preferences, no income effect exists,only substitution effect exists.

So naturally, CV has to be equal to EV

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