Question: Consider the problem Max:X1a X2b-a (X1 + b-a)-b subject toP1X1 +P2X2 = m Where a, and b are constants. a. Solve the problem and thereby

Consider the problem

Max:X1a X2b-a (X1 + b-a)-b subject toP1X1 +P2X2 = m

Where a, and b are constants.

a. Solve the problem and thereby find the two demand functions

X1 = D1 (P1, P2, m) and X2 = D2 (P1, P2, m)

b. Check the signs of partials of X1 and X2 w.r.t. P1 and P2 and m.

c. Verify that D1 and D2 are homogeneous of degree 0.

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