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Unformatted text preview: Cornell University Economics 3130 Problem Set 8 Due 4/3/09 1. Suppose there are two consumers A and B comprising the entire market for good x 1 . There is also a good x 2 . As consumption bundle is x A = ( x A 1 ,x A 2 ) and Bs is described in similar fashion. Their utility functions are u A 1 = x A 1 + 200 3 x A 2- ( x A 2 ) 2 and u B 2 = x B 1 + 400 3 x B 2- ( x B 2 ) 2 . The price of good x 1 is 1 and the price of good x 2 is p . Individuals have incomes I = ( I A ,I B ) Assume that both individuals have sufficient income so that an interior solution characterizes their optimal choices. (a) What are the (Marshallian) demands for A and B ? What is the market demand X 2 ( p,I )? (b) What are the indirect utility functions for A and B? (c) What is As price elasticity of demand for good 2? What is Bs? What is the price elasticity of market demand for good 2? Now, suppose that the supply curve for good 2 is y s 2 =- 20 + 2 p and that the market is competitive....
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