GROUP A

1. An agent has a utility function over goods 1 and 2 of the form, where c is your

individual numberand dis your minimum number. The agent's income is equal to your 2-digit

number.Thepriceofgood1isyour maximumnumberand the price of good 2 is your

median number.

Derive the agent's demand functionsfor good 1 and good 2. Calculate the quantities of good

1 and good 2 in the agent's optimum bundle.

2. An agent has a utility function over goods 1 and 2 of the form, where c is your 1-digitnumberand dis your minimumnumber.Theagent'sincomeisequaltoyour 2-digit

number. Initially, the price of good 1 is your median numberand the price of good 2 is your

individual number.

Let the price of good 1 change to your maximum number. For good 1, determine for this price

change the

a)total price effect

b)the substitution effect

c)the income effect

3. For the same problem you analysed in Question 2, find for that price change the

a)Laspeyres measureof the welfare change

b)Paasche measureof the welfare change

c)compensating variation

d)equivalent variation