PS11+exercises - q D p;Y What is the income elasticity of...

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Intermediate Microeconomics, 2010 Problem Set 11: Exercises 1. A Quasilinear Economy: Suppose Y = 2, c ( q ) = q + q 2 and U ( m; q ) = m + ln q . The price of money m is always one. Di erent from before, we allow m to be negative. (a) Find the (inverse) supply and demand functions, P S ( q ) and P D ( q; Y ). (b) Find the competitive equilibrium price and quantity, i.e., q s.t., P S ( q ) = P D ( q ; Y ). What is the pro t of the rm? How much money m has the consumer left in her pocket? (c) Find the (Marshallian-) Demand function for
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Unformatted text preview: q , D ( p;Y ). What is the income elasticity of q ? (d) You probably know already that quasilinear preferences have an important im-plication for the Slutsky Decomposition: If the price changes, demand changes only because of the Substitution E±ect. Can you show that this is the case? Use either a graph or the formal decomposition into elasticities. 1...
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