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(1) [20 points] A consumer with income / = 3 has utility function U(x) = log(x1) + x2. Note: here log(x) denotes the natural logarithm
(1) [20 points] A consumer with income / = 3 has utility function U(x) = log(x1) + x2. Note: here log(x) denotes the natural logarithm of r in base e.] (a) Find the Marshallian demand. Initially prices are pu = (1, 1). Let a = (x9,x9) = D(p', I) and uo = V(p', I). Assume the price of good I increases so that the new prices are p' = (2, 1). Let a = D(p' , I) and u1 = V(p' , I). (b) Find the Hicksian demand h(p , u). What are the income and substitution effects associated with this price change. Draw a picture, including the indifference curves U (a ) = u" and U(r) = u , clearly showing these two effects
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