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Unformatted text preview: Econ 701 Microeconomic Theory - Problem Set #3 Income and substitution effects, expenditure functions and elasticities Consider the utility function 2 1 2 1 y x U = . 1. For the utility function, find: a. Demand functions b. Compensated demand functions c. The Expenditure function. d. The Indirect Utility function. 2. Using your expressions above and the Slutsky equation, develop mathematical expressions for the size of the income effect and the size of the substitution effect as functions of prices and income. Now, consider a situation in which the price of good x is 5$, the price of good y is 10$, and the consumer has 100$ of income. All you really have to do is apply your results from above. 3. Using the indirect utility function, find the consumers utility level at this level of consumption (label this result ) 1 U . How much of goods x and y is the consumer consuming at this price and income combination?...
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- Spring '09