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Unformatted text preview: 1) Suppose Anni has the following utility function: u = x 1/2 y 1/2 . Suppose initially that Px = Py = $20 and that I = $4000. Suppose the price of x now increases to Px = $80. a) With details on the numbers of units in the optional bundles, indicate Annis before and after position on her indifference curvebudget line diagram. b) Using the Hicks method, figure out the Hicks substitution effect bundle and show it in your diagram. c) Transfer this information onto a detailed Marshallian demand curve and show the Hicksian demand curve for the original level of utility. 2) Suppose there are two markets: the market for Butter, B, and market for Guns, G. Suppose the demand curve in each market is linear. That is: X B = K sP B and X G = F - tP G where X i is the quantity in each market as indicated by the subscript. Suppose these two demand functions intersect the quantity axis at the same value, i.e., K = F. Show, using the point elasticity formula, that if prices are such that quantities are equal in these two markets, then...
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- Fall '06