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Unformatted text preview: Homework Assignment # 2 Econ 150b. Intermediate Microeconomics due January 30, 2008 (in class) Please put your discussion-section time and TAs name on your answer. This homework uses our model of choice to explore a simple policy question. Let the agents utility function be the Cobb-Douglas function u.x 1 ;x 2 / D x a 1 x 1 a 2 . To set the context, you can interpret good 1 as food and good 2 as a composite of other things the agent might consume, or equivalently as money spent on other goods. To be concrete, let p 1 D p 2 D 1 and let m D 1000 . It may seem arbitrary to simply set these prices equal to one, but since we have said nothing about the units in which our goods are measured, this assumption about prices sacrifices no generality. 1. Formulate the consumers budget constraint. Calculate the utility maximizing quantities of good 1 and good 2. (These will be a function of a ; this calculation is straight out of Homework 1.) 2. Now suppose that the government would like to increase the welfare of this consumer,2....
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- Spring '08