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HW4-solution

HW4-solution - Econ 501 Homework Assignment 4 No need to...

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Econ 501 Homework Assignment 4 No need to turn in 1. BB 5.5 a) At the consumer’s optimum we must have y x xy MU MU PP yx = = Substituting into the budget line, Px Py I + = , gives 2 2 y x y y P Py P yI P Py I I y P ⎛⎞ += ⎜⎟ ⎝⎠ = = b) Yes, clothing is a normal good. Holding y P constant, if I increases y will also increase. 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 0 5 10 15 20 25 Y Price(Y) D 1 D 2 c) The cross-price elasticity of demand of food with respect to the price of clothing must be zero. Note in part a) that with this utility function the demand for y does not depend on the price of x . Similarly, you can show

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that the demand for food is x = I / (2 P x ), which does not depend on the price of y . In fact, the consumer divides her income equally between the two goods regardless of the price of either. Since the demands do not depend on the prices of the other goods, the cross-price elasticities must be zero. 2. BB 5.8 a) A B C Substitution Effect Income Effect X Y
b) A B C Substitution Effect X Y Income Effect = 0 c) A B C Substitution Effect X Y

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HW4-solution - Econ 501 Homework Assignment 4 No need to...

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