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Question 2 A utility function is known as quasilinear if it is of the form UTE? y] = (3) + y: where am is a
Question 2 A utility function is known as quasilinear if it is of the form UTE? y] = \"(3) + y: where am is a strictly increasing, strictly concave function. That is, n'(:s) 3:: U and a\"{m] A". II] for all 1:. (Hint: If you really nd it too hard to work with a general function a{-), you can assume \"ll-(I) = ln :1: for this exercise. However, I do wish to push you towards working with general functions since it reduces the temptation for you to actually calculate the derivatives.) {a} (Level A} Write down the MRS in terms of ELI). Does your answer depend on y? (b) (Level A) Using your answer to {a}, argue that, when I is on the IEDflS and y is on the yaxis, the indier-ce curves are vertically parallel that is, the indierence curves have the same slope along any vertical line. {c} (Level B) Suppose the consumer is not at a corner solution. What is the income elasticity of Good X when the utility function is quasilinear? (Hint: Sketch an indifference curve diagram with an increase in income. How will the optimal bundle change?) {d} (Level B} Consider a consumer with a quasilinear utility function and is not at a corner solution. With a welllabeled diagram, decompose graphically the price effect of a decrease in the price of Good X into the substitution effect and the income effect. (e) (Level B) Given your answer to part {d}, what is the relationship between the Hicksian demand and the Marshallian demand of lGood X when the utility function is quasilinear
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