Question
2. (25 points) Answer the following short questions: a. (7 points) Suppose that a consumer's preferences between goods x and y are represented by the
2. (25 points) Answer the following short questions: a. (7 points) Suppose that a consumer's preferences between goods x and y are represented by the utility function u(x, y) = x 2 + 16xy + 64y 2 . If these two goods have the same price, describe the optimal consumption choice of this consumer. b. (10 points) Suppose that when the price of a good changes, the income and substitution effects change the consumer's demand for that good in opposite directions. i. Is this good a normal or an inferior good? Explain. ii. Is this good a Giffen or an ordinary good? Explain. c. (8 points) Is the following statement true or false? The difference between a monopolist's marginal cost and its profit-maximizing price is smaller when the demand is more elastic
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