Suppose there exists a consumer with a Cobb-Douglas utility function. U = x a 1x (1a) 2
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Question:
a) m p2 Suppose the value of a is a = 4 5 . Suppose that this consumer has an income of $1,000. Suppose that the price of good 1 is p1 = $5 and the price of good 2 is p2 = $10.
a) . Calculate the amount demanded of good 1 at this initial equilibrium.
b) . Suppose the price of good 1 decreased to p1 = $4. What will be the new amount demanded of good 1 at this new equilibrium?
c) . This change in consumption of good 1 can be broken down into a substitution effect and an income effect. Calculate these two effects.
d) .Is good 1 a normal good, inferior good, or Giffen good? How do you know? .
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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