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How to answer these questions? 2. InCOme and SubstitutiOn Effects Preferences are represented by the utility function u($1, 352) = 1 km +352. You may

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2. InCOme and SubstitutiOn Effects Preferences are represented by the utility function u($1, 352) = 1 km +352. You may also assume throughout this question that nonnegativity constraints are not an issue. (a) Use a Lagrangian to calculate the COnsumer's Optimal choices (call this bundle (5:0)) at p1 = 1, p2 = 2, m = 1. Also calculate the utility of :3", call it u\". (b) Use the intuitive (bang-perbuck) method tO nd the bundle 9;" in part (a). (c) Now suppose the price Of gOOd 1 increases tO p1 = 2, while there is no change in 132. i. Calculate a": (the bundle that allocates money Optimally at the new prices, but is on the same indifference curve as 11:"). ii. Calculate the CV (\"compensating variation\"): how much compensation is needed to afford 3:\"? iii. Calculate (Bf (the Optimal bundle at new prices and old income). (d) Finally, calculate the income and substitution effects using your answers to (c). 3. Again for the utility functiOn in Q2, (a) Calculate the Hicksian (\"compensated\") demand functions, x3091, 392,1?) and 323 ($91,392, u*), for any a,\" > iii3'1 Verify that m'i(2, 2, 15") matches your answer to Q2(c)(i) (where u\" is the utility in Q2(a)). (b) Calculate the expenditure function 8(p1, p2, u), and verify that your answer to Q2(c) (ii) is the same as 8(2, 2, a\") 80., 2,119) (the extra cost of attaining Original utility a\" when 391 increases from 1 to 2)

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