solution5_Solutions - You know what the demand function for...

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Some Solutions for Section Handout 5 Some Solutions for Section Handout 5 Some Solutions for Section Handout 5 Some Solutions for Section Handout 5 1. b I1 = 1*1 + 2*2 = 5 b Under B/L1, (y1,y2) is affordable, but (X1,X2) was chosen. So, (X1,X2) is revealed preferred to (Y1,Y2) b I2 = 2*2 + 1*1 = 5 b Under B/L2, (X1,X2) is affordable, but (Y1,Y2) was chosen. So, (Y1,Y2) is revealed preferred to (X1,X2) b This is a contradiction. Therefore, WARP is violated. This is a contradiction. Therefore, WARP is violated. 2. b I1 = 1*1 + 2*2 = 5 b Under B/L1, (Y1,Y2) is not affordable. So, no preference is revealed over (X1,X2) and (Y1,Y2) b I2 = 2*1 + 1*3 = 5 b Under B/L2, (X1,X2) is affordable, but (Y1,Y2) was chosen. So, (Y1,Y2) is revealed preferred to (X1,X2) b No violation of No violation of WARP WARP 4. U(X1,X2) is Cobb-Douglas Utility function
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Unformatted text preview: You know what the demand function for X1 looks like. X1 = a/(a+b)*I/Px If you differentiate the above function w.r.t. own price, the other good s price and income respectively and multiply appropriate term according to the definition of eacy elasticity, you will get the following. (Sorry, it is very hard to write differentiation equations by MS word) Own price elasticity : 1 Cross price elasticity : 0 Income elasticity : 1 5. This is Quasi-linear utility function. By MRS = ERS condition, we can derive a demand function for X. That is X = P y 2 / (4P x 2 ) There is no income effect in X, because there is no term such as income in the above equation. Therefore, Hicksian and Marshallian demand curve will be same. b CS = EV = CV...
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solution5_Solutions - You know what the demand function for...

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