Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose a consumer's utility function is given by U(X, Y ) = X ^1/ 4* Y ^3/ 4 . Also, the consumer has $60 to

Suppose a consumer's utility function is given by U(X, Y ) = X ^1/ 4* Y ^3/ 4 . Also, the consumer has $60 to spend. The price of X, PX = $3, and the price of Y, PY = $4.

a)How much X and Y should the consumer purchase in order to maximize their utility?

b)What is the consumer's indirect utility function?

c)) How much utility does the consumer receive?

d)Now suppose PX increases to $6. What is the new bundle of X and Y that the consumer will demand?

e)How much money would the consumer be willing to pay to avoid the price increase? Is this compensating variation or equivalent variation?

f)How much additional money would the consumer need in order to have the same utility level after the price change as before the price change? Is this compensating variation or equivalent variation?

g)Of the total change in the quantity demanded of X, how much is due to the substitution effect and how much is due to the income effect? Note: since there is an increase in the price of Good X, these values will be negative.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dynamic Business Law The Essentials

Authors: Nancy Kubasek

1st Edition

0073377686, 9780073377681

More Books

Students also viewed these Economics questions