Question 1: CES Preferences (15 marks) Suppose that a consumer has wealth, W, consumers from a set of differentiated varieties we and solves the following CES maximization problem: max u 1 = ( -6.96w)*dw) * -- [, pla)g/w.dwS x (1) (4) where o > 0 is the elasticity of substitution between varieties, q(w) is the quantity consumed of variety w and plw) is the price of variety w (a) Show that w is the elasticity of substitution, i.e. for any w w' e = din au/al (b) What happens as o +00? 0 1700? Question 1: CES Preferences (15 marks) Suppose that a consumer has wealth, W, consumers from a set of differentiated varieties we and solves the following CES maximization problem: max u 1 = ( -6.96w)*dw) * -- [, pla)g/w.dwS x (1) (4) where o > 0 is the elasticity of substitution between varieties, q(w) is the quantity consumed of variety w and plw) is the price of variety w (a) Show that w is the elasticity of substitution, i.e. for any w w' e = din au/al (b) What happens as o +00? 0 1700