Question
An individual has the utility function, U(X, Y) = 0.5log(X) + log(Y). Let her income be I > 0 and the prices of goods X
An individual has the utility function, U(X, Y) = 0.5log(X) + log(Y). Let her income be I > 0 and the prices of goods X and Y be Px > and Py > 0.
(a) Determine whether her utility function exhibits increasing, diminishing, or constant marginal rate of substitution.
(b) Prove that her expenditure function is homogenous of degree 1 in prices.
(c) Suppose the price of X increased by 20% but the price of Y decreased by 50%. By what percentage and in which direction should her income change to make her as well off as she was before the change in prices? [Note: DON'T choose numbers for Px and Py].
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International Economics Theory and Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
9th Edition
978-0132146654, 0132146657, 9780273754091, 978-0273754206
