Question: Question 1 Let an individual's utility function be given as 4(x1, X2) = 2 vx1X2. a) Compute the Marginal Rate of Substitution. b) Initially, the

the indi- vidual's consumption of the first good is cut to x,

= 50. What is the new level of consumption of good 2,

x2, that the individual needs to consume in order to reach the

Question 1 Let an individual's utility function be given as 4(x1, X2) = 2 vx1X2. a) Compute the Marginal Rate of Substitution. b) Initially, the individual consumes bundle (x1 = 100, x2 = 12.5). Then, the indi- vidual's consumption of the first good is cut to x, = 50. What is the new level of consumption of good 2, x2, that the individual needs to consume in order to reach the same utility level as before? c) Given the prices p1 = 1 and p2 = 2 for the first and the second good, respec- tively, and a budget of m = 100, what is the best consumer choice? d) Find the individual's general demand function for good 2. e) If the price for the first good rises to p, = 50, how much less of good 2 will the individual conusme? f) Assuming the demand function for good 1 is x (PI ) = 1 p, I m, what is the inverse demand funtion, and what is the own-price elasticity of demand for good 1! g) Assuming the demand function for good 1 is xi (pi ) = = ", show mathemati cally that the good is not inferior.Question 2 An individual's preferences over consumption bundles A, B, and C are given as A > B B Z C A > C Are these preferences transitive? Explain why or why not!The demand function is given by X =Ap Y with x giving the demand, p the price and a and y as positive parameters. a) Derive the price elasticity of demand, E. What is the economic meaning of the price elasticity of demand? What is elastic, what is inelastic demand? b) Denote revenues as a function of demand x and price p. How do revenues change as a reaction to an increase of the price, if demand is inelastic? c) Is the good in focus a Giffen good? Explain your answer both verbally and analytically

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