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A consumer has the following preferences u(x1,x2)=ax1+bx2 Suppose the price of good 1 isp1and the price of good 2 isp2. The consumer has incomem. (a)
A consumer has the following preferences
u(x1,x2)=ax1+bx2
Suppose the price of good 1 isp1and the price of good 2 isp2. The consumer has incomem.
(a) Plot this consumer's indifference curves. What is the marginal rate of substitu- tion for this consumer?
(b) Solve the utility maximization problem and write down the Marshallian demand function for good 1 in terms ofp1(takingp2andmas fixed). Also, Plot the demand curve. [Hint: The demand function will display unusual behavior when the price ratio is in the neighborhood ofa/b.]
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