Intermediate Microeconomics  Wissink
BRIEF ANSWERS TO PROBLEM SET #2
1.
The demand systems would be as follows: For u=ax+by you get either one corner or the other depending
on how a/b compares to the price ratio.
So, x*=I/p
x
and y*=0 when a/b>p
x
/p
y
and y*=I/p
y
and x*=0
otherwise (Note that when a/b = p
x
/p
y
I have opted to consume only y.
Really, any combination of x and y
would work in that knife edge case.)
For u=min{ax, by} you have to recognize that you always want ax=by.
Therefore x=(by)/a.
Now plug
that into the budget line and solve for y and you get: p
x
x+p
y
y=I where x=(by)/a.
You eventually get:
y*=(aI)/(bp
x
+ap
y
) and x*=(bI)/(bp
x
+ap
y
).
2.
The Price Consumption Curve (PCC) (or price offer curve)for a change in the price of x looks as
follows:
y
x
PCC
u=xy
p /p
x
y
= 1
PCC
y
x
u=x+y
y
x
PCC
u=min{x,y}
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2
y
x
u=xy
E
E
E
0
1
H
3.
The Income Consumption Curves (ICC)
 or income offer curves  look as follows:
ICC
u=xy
y
x
ICC
u=min{x,y}
y
x
4.
The income and substitution effects for an increase
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 Fall '06
 MASSON
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