PS 2

# PS 2 - c) Let P X increase to \$2.25 leaving P Y at \$3....

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Quantitative Microeconomics Problem Set #2 1) Suppose that Fred spends his money on food (X) and housing (Y). His utility function is given by U=XY 2 . a) Show that the Slutsky equation holds for Fred's utility function. (That is, calculate the left and right hand sides of the Slutsky equation for this utility function and show that they are equal. See Example 5.4 in Nicholson) b) Initially let P X =2, P Y =3, and M=\$200. Find the utility-maximizing consumption bundle. What level of utility does Fred achieve?
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Unformatted text preview: c) Let P X increase to \$2.25 leaving P Y at \$3. Using the Slutsky equation, find the income and substitution effects of that price change. 2) A luxury good is defined as a good for which the income elasticity of demand is greater than 1. Suppose that rich consumers spend equal fractions of their income on exotic foods, expensive cars, and designer clothing. These are the only goods they buy. Can all of these goods be luxury goods? Show how you arrive at your mathematically....
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## This note was uploaded on 03/26/2008 for the course EC 16 taught by Professor Loury during the Fall '07 term at Tufts.

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