Unformatted text preview: (Use a standard consumer’s surplus “triangle” calculation). 2. A consumer has a utility function u(x 1 , x 2 ) = x 1 " x 2 1 ! " . a) Find the consumers demand functions, expenditure functions, and compensated demand functions. Hint: we have done these calculations before – look up the answers from the notes and earlier problem sets . b) Suppose the consumer has initial income I=10, and faces prices p 1 = p 2 = 1. Consider the effect of a change in the price of the first good to p 1 =2. Calculate the consumers surplus (CS) associated with this change, the compensating variation (CV), and the equivalent variation (EV). Draw a graph illustrating the relation between CS, CV and EV for this case....
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- Fall '08
- Economics, industry supply curve, Problem Set Number, marginal cost schedule