hw3 - m , on goods x 1 and x 2 with prices p 1 and p 2 ,...

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Homework Assignment # 3 Econ 150b. Intermediate Microeconomics due February 6, 2008 (in class) Please put your discussion-section time and TA’s name on your answer. 1. Consider a consumer whose utility function is given by u.x 1 ;x 2 / D .˛x ± 1 C .1 ± ˛/x ± 2 / 1=± ; where ± 2 .0;1/ is a parameter. Using any of the three methods we’ve seen in class, find the optimal consumption bundle as a function of prices .p 1 ;p 2 / and income m . Plot the demand and Engel curves. 2. A consumer spends her total income,
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Unformatted text preview: m , on goods x 1 and x 2 with prices p 1 and p 2 , respectively. The price p 2 decreases and as a result the consumption of x 1 increases. Therefore: (a) x 1 is a normal good (b) x 2 is an inferior good (c) the consumption of x 2 may increase, but the total expenditure on x 2 does not change Discuss each of the three statements above, indicating whether they are true or false. 1...
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