Quiz 6. DemandFcnAns

Quiz 6. DemandFcnAns - x 1 . ( Hint : Set MRS = -p 1 / p 2...

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Shomu Banerjee ECON 201 DEMAND FUNCTION #1 ANSWERS Ambrose consumes two goods, x 1 and x 2 , spending all his income m on them. The price of x 1 is p 1 , while that of x 2 is p 2 . His utility function is u ( x 1 , x 2 ) = 4 1 x + x 2 . The marginal utility for x 1 is MU 1 =2/ 1 x while the utility for x 2 is MU 2 =1. (a) Calculate Ambrose’s marginal rate of substitution. ( Hint : MRS = - MU 1 / MU 2 ) MRS = 1 2 x (b) Calculate Ambrose’s demand for
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Unformatted text preview: x 1 . ( Hint : Set MRS = -p 1 / p 2 ) From 1 2 x = 2 1 p p , solve for x 1 : x 1 = 2 1 2 2 4 p p . (c) Calculate Ambroses demand for x 2 . ( Hint : Use the budget equation p 1 x 1 + p 2 x 2 = m ) Substitute for x 1 from (b) above into the budget equation and solve for x 2 : x 2 = 1 2 2 4 p p p m ! ....
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