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Unformatted text preview: Economics 150, Intermediate Microeconmics, Fall 2008 Please put your discussion-section time and TA name on your answer. Homework 4, Wednesday, October 8 Due Wednesday, October 15 This homework first examines the notion of consumer surplus. Consider the utility function U ( x 1 ,x 2 ) = x 1 x 2 . 4.1 Find the demand function for good x 1 and the income elasticity of good x 1 . 4.2 Find the indirect utility function. 4.3 Find the compensated demand function for good x 1 . 4.4 Let I = 10 and p 1 = p 2 = 1. Now consider the effects of increasing the price of good 1 to p 1 = 4. Find the compensating variation, the equivalent variation, and the change in consumer surplus associated with this price increase. Explain why these differ, and why they bear the relationship the do to one another. 4.5 Now repeat your answers to question [4.1] and [4.3][4.4], this time with utility function U ( x 1 ,x 2 ) = 10 x 1- x 2 1 + 10 x 2 . Explain why the compensating variation, equivalent variation, and change in consumer surplus agree in this case. Why didnt you need the indirect utilitysurplus agree in this case....
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