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f(2) Since you will need the Hicksian demand function to answer this question, you may want to verify your answer for (1)(c) by solving the

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\f(2) Since you will need the Hicksian demand function to answer this question, you may want to verify your answer for (1)(c) by solving the cost minimization problem and constructing the expenditure function and the Hicksian demand function directly. (8.) Initially the consumer has income I = 72 and prices are p0 = (1, 1). Let 2:0 denote the consumer's optimal consumption bundle at those prices. Assume that the price of good 1 increases so that the new prices are p1 = (2, 1). Let :31 denote the consumer's optimal consumption bundle at the new prices What are the income and substitution eEects for this price change? You may want to refer to the gure on page 44 of the class notes and explicitly nd the corresponding points A, B and C in this case. (b) In the same picture, draw the graph of the Marshallian demand and Hicksian demand for good 1 (with 3:1 in the horizontal axis and p1 in the vertical axis). Clearly indicate in your picture, the values of these functions at 191 = 1 and 19% = 2. (c) What is the compensating variation (CV) associated with the price change from p0 to p1? What is the corresponding change in consumer surplus (ACS)? You may want to use the graph you drew in (b) to indicate the areas that represent CV and ACS. However, you must also provide a precise computation for CV and ACS

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