Question
The Marshallian demand function for good x is given by: x = I/(2p x ).The compensated demand function for good x is given by: x
The Marshallian demand function for good x is given by: x = I/(2px).The compensated demand function for good x is given by: xc= [(py/px)U]1/2. The indirect utility function for this consumer choice problem is given by:V(px, py, I) = I2/4pxpy. In this example, the substitution effect for good x own-price change (as opposed to cross-price effect) is given by the following equation:-a(I/px2), where a is a constant. Constant a is equal to what?
Please show steps to solve for "a".
I attempted to differentiate dx/dpx and dxc/dpx. I do not think my solution for dxc/dpx is correct, and when I substitute indirect utility function V for U, I am unsure how to simplify this to get the substitution effect formula.
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