Suppose there are only two goods x, x2, with the price of the second good normalized...
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Suppose there are only two goods x₁, x2, with the price of the second good normalized (P₁, 1). For each of the following utility functions, sketch the graph of the indifference curve corresponding to u(x) = 1, and sketch the expenditure function corresponding to the constraint u(x) ≥ 1. Next, verify Shepard's Lemma for ₁ where the expenditure function is differentiable. What is true when the expenditure function is not differentiable? (a) (Perfect complements) u(x) = min{ax₁, bx2} where a, b > 0 (b) (Perfect substitutes) u(x) = ax₁ + bx2 where a, b>0 Suppose there are only two goods x₁, x2, with the price of the second good normalized (P₁, 1). For each of the following utility functions, sketch the graph of the indifference curve corresponding to u(x) = 1, and sketch the expenditure function corresponding to the constraint u(x) ≥ 1. Next, verify Shepard's Lemma for ₁ where the expenditure function is differentiable. What is true when the expenditure function is not differentiable? (a) (Perfect complements) u(x) = min{ax₁, bx2} where a, b > 0 (b) (Perfect substitutes) u(x) = ax₁ + bx2 where a, b>0
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a Perfect complements ux minax1 bx2 where a b 0 Indifference curve Expend... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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