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Suppose the utility function for an individual consuming goods x and y is: U (x, y) = x + 4y Individual income is given by
Suppose the utility function for an individual consuming goods x and y is: U (x, y) = x + 4y
Individual income is given by m. The price of good x is px and the price of good y is py.
- Find the Marshallian (uncompensated) demand function for each good.
- Determine the Indirect Utility Function and the Expenditure Function.
- If the price of y doubled, how much would m have to increase so that the individual was equally well off after the price change as compared to before the price change?
- Now suppose there are two individuals with the same preferences as above except y is a pure public good. If the marginal cost of producing a unit of the public good y is 2, what is the efficient amount of pure public good provision? Explain whether or not this efficient amount will be provided if individuals choose how much y to purchase (you can assume that py = 2 and px = 1 in your answer.)
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