Question
Consider a consumer with the Utility function: U = C1/5 O 4/5 and facing a budget constraint: M PCC +POO Note: For this utility function
Consider a consumer with the Utility function: U = C1/5 O 4/5 and facing a budget constraint: M PCC +POO Note: For this utility function MUC = (1/5)C-4/5 O 4/5 and MUO = (4/5)C1/5 O -1/5 Where C denotes the consumption of corn, and O denotes the consumption of other goods.
A) Derive the Marshallian demand functions for C and O using the equilibrium conditions for an interior solution.
B) Graph and fully label the Demand Curve for corn if income is M=100. To be able to do this, solve for demand when the price of corn is 10, 20, and 40, then approximate the demand curve using these three points.
C) For corn, characterize the income elasticity of demand, the price elasticity of demand, the cross price elasticity of demand and explain what each represents. (You do not need to calculate each elasticity, just tell me if it is positive or negative.) Is corn a normal good?
D) Determine the indirect utility function for the consumer and describe what the indirect utility function represents. Suppose, as in C), PC = 1 and PO = 1. What is the value of the indirect utility function? Suppose PC increases to 2; calculate the new value for the indirect utility function. Explain why the indirect utility function increased or decreased.
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