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QUESTION ONE The consumer seeks to maximize utility subject to the budget constraint as below. max u = x 1 x 2 st p 1

QUESTION ONE

The consumer seeks to maximize utility subject to the budget constraint as below.

max u = x₁x₂

p₁x₁+ p₂x_{2 = M}

Required

a)Derive the indirect utility function (10marks)

b)Derive the ordinary demand functions from (a) solution above (5marks)

c)Explain the difference between Hicksian and Slutsky compensation (5marks)

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