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1. Anai's draws on old-school/rare music for inspiration as a part of her own creative process. For the following, assume that her preferences are Cobb-Douglas
1. Anai's draws on old-school/rare music for inspiration as a part of her own creative process. For the following, assume that her preferences are Cobb-Douglas (utility function U = Cilia ) over CDs which are denoted by the variable C (xaxis good) and a composite good denoted by the variable X. Let PC 8: PX denote the prices. a. Derive her Marshallian Demand for CDs, Compensated Demand for CDs, Compensated Demand for the composite good, and expenditure function. h. Ana'is lives off royalties from the music and plays she writes, which provides her a monthly income of 51,000. Last month, when the price of rare (:05 was $50 and the composite good's price was 51, she bought 10 CDs. It is predicted that a proposed regulation on sellers of physical music formats would increase the market price of rare CDs from $50 to $100. Use the implied change in the expenditure function to compute her Compensating Variation for this potential price increase. c. What is the change in Marshallian Consumer Surplus that would be associated with this price increase? Hint: review the solved problem 5.2 on page 147 of the text book. d. Recall that we can also compute CV as the integral under the compensated demand curve {setting utility equal to the baseline utility). Verify your answer to part b using this approach. e. Graph the compensated and uncompensated demand functions for this problem and denote both CV and the change in C5 on the graph (this will parallel the integration that you did for parts d and e). Also, identify the difference \"wedge" between the change in CS and CV. f. In no more than three sentences, provide some intuition for why the change in CS and CV diverge
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