Suppose that the preferences of a consumer regarding the consumption of goods q and q2 are...

 

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Suppose that the preferences of a consumer regarding the consumption of goods q₁ and q2 are represented by function: U(9₁, 92) In (91) + 921 = 1 Suppose also that the consumer is endowed with some disposable income Y> 0 and faces prices P₁ and p2 respectively for goods q₁ and q2. Finally, assume that the price of good q2 is equal to P₂ = 1.1 ¶ a. →Draw a diagram reporting the indifference curves representing the preferences of the consumer and the budget line. Also, derive and describe the demand functions of the consumer for goods q₁ and q2. Draw the diagram for the (Marshallian) demand functions of the two goods. → →> [15 marks] →> b. Consider an increase in price p₁. Drawing and describing the indifference curves and budget constraint, and referring to the concepts of substitution effect and income effect, report how the quantity demanded of q₁ changes when p₁ increases. Referring to the concepts of equivalent variation, compensating variation and consumer surplus, describe- how the consumer's welfare is affected by the change in price. → [20 marks] c. →Consider now the dual problem. Specifically, minimise the expenditure function subject to the consumer achieving a level of utility u > 0 and derive the Hicksian demands for goods 9₁ and 92. Report the expression of the minimised expenditure function... [15 marks] Suppose that the preferences of a consumer regarding the consumption of goods q₁ and q2 are represented by function: U(9₁, 92) In (91) + 921 = 1 Suppose also that the consumer is endowed with some disposable income Y> 0 and faces prices P₁ and p2 respectively for goods q₁ and q2. Finally, assume that the price of good q2 is equal to P₂ = 1.1 ¶ a. →Draw a diagram reporting the indifference curves representing the preferences of the consumer and the budget line. Also, derive and describe the demand functions of the consumer for goods q₁ and q2. Draw the diagram for the (Marshallian) demand functions of the two goods. → →> [15 marks] →> b. Consider an increase in price p₁. Drawing and describing the indifference curves and budget constraint, and referring to the concepts of substitution effect and income effect, report how the quantity demanded of q₁ changes when p₁ increases. Referring to the concepts of equivalent variation, compensating variation and consumer surplus, describe- how the consumer's welfare is affected by the change in price. → [20 marks] c. →Consider now the dual problem. Specifically, minimise the expenditure function subject to the consumer achieving a level of utility u > 0 and derive the Hicksian demands for goods 9₁ and 92. Report the expression of the minimised expenditure function... [15 marks]

Answer rating: 100% (QA)

a Preferences are represented by Uq1 q2 lnq1 q2 Indifference curves will be straight lines with slop... View the full answer