Question
3. Suppose a consumer has the following utility function from two goods, x and y: U(x, y) = x0.25 0.75 (a) Suppose the price
3. Suppose a consumer has the following utility function from two goods, x and y: U(x, y) = x0.25 0.75 (a) Suppose the price of good x is 10 and the price of good y is 15. What is the utility-maximizing bundle for the consumer when they have a budget of 360 available to spend? What is the utility level achieved at this bundle? (b) Suppose the price of good x is 15 and the price of good y is 15. What is the expenditure minimizing bundle that will yield utility level equal to 15.136. Show that the minimum expenditure level to get this utility level is 398.405. (c) Using your answers from the previous two parts, explain why the minimum compensation the consumer requires to undo the harm of the change in price of x from 10 to 15 is 38.405. Draw a diagram to illustrate.. (d) Suppose prices of the two goods are pr and py, respectively, and assume they are positive. Assume the consumer has an income of m> 0. Find the indirect utility function V (Px, Py, m). (e) Using the indirect utility function V (px, Py, m), find the expenditure function E(px, Py, u), where u is the target utility level.
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