Mid-term practical question

Mid-term practical question - Practical question for...

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Practical question for midterm 1) The utility function for a consumer is given by U(X, Y) =XY. The price of goods X and Y are $5. The consumer has $200 of income. Hint you have to use first derivative to get MRS =MUx/MUy. a) Derive the demand bundle (X*, Y*) and the utility level at (X*, Y*), Ū. b) Now suppose that the price of good X increases to $10. Solve for the new demand bundle (X**, Y**) and the utility level at (X**, Y**), Ū. c) Draw a diagram in X-Y space clearly labeling all optimal bundles, indifference curves, budget lines, slopes, and intercepts. d) On your graph, show the income and substitution effects of the price change. e) Under the new pricing scheme, the amount of income needed to make the consumer just as well off as he was before prices changed is called the compensating variation. Calculate the compensating variation for this consumer and label it on your graph. f) How much income would the consumer need to be compensated so that she could afford her original bundle? Is this more or less than the compensating variation? g) What does Slutsky Equation describe? Write the equation.
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This note was uploaded on 02/03/2010 for the course ECON econ102a taught by Professor Bandy during the Winter '09 term at UC Riverside.

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Mid-term practical question - Practical question for...

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