(CV, EV and CS) Consider a person who has a utility function U (x1; x2) = min...
Question:
(CV, EV and CS) Consider a person who has a utility function U (x1; x2) = min (2x1; x2). This is a person for whom goods 1 and 2 are perfect complements. This utility function is not differentiable, and so we cannot use calculus on it when solve for the demand functions.
[a] Formulate the relevant utility maximization problem, find the optimality conditions, and solve for the demand functions for x1 and x2, assuming that the person faces a budget constraint p1x2 + p2x2 = I
b] Find the indirect utility function V (p1;p2;I) and the marginal utility of income d[
c] Suppose now that I = 150 and p1 = p2 = 1. Now consider an increase in the price of good 1 from p1 = 1 to p01 = 3. Find the ìcompensating variationî(CV) and the ìequivalent variationî (EV) associated with this price change. Would consumer surplus (CS) be a good measure of the disutility of price changes for a person with this utility function? Why or why not (brieáy)?
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba