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2 (a) What IS the indirect function's1 What does 1t show? (b) A consumer has an indirect utlllty 41.3 41.? function u : 25y p1
2 (a) What IS the indirect function's1 What does 1t show? (b) A consumer has an indirect utlllty 41.3 41.? function u : 25y p1 p2 . His income is y=$5000; the price of good 2 changes from p2 = $4 to p2 = $2, while p1 = $4. Is the consumer better off as a result of this price change, worse oil, or equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which denes the compensating variation in this case. (d) Now solve that equation calculate the numerical value of the WTP for the price reduction in this case. (e) The minimum amount of compensation that the consumer would have wanted to forego the price decrease is given by the equivalent variation this is the WTA value of the price reduction. Write down the algebraic equation which denes the WTA value in this case (you don't need to solve the equation). (1] If you solved the equation in (e) you are not asked to solve it do you expect that the WTA value would turn out to be the same as the WTP value in part ((1), larger, or smaller? Explain your reason
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