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....
View
Full Document
 Fall '08
 Staff
 Economics, industry supply curve, Problem Set Number, marginal cost schedule

Click to edit the document details