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Unformatted text preview: x ? Suppose that initially P x = P y = 10 and M = 10 and the price of good x is increased to P x = 20 (iv) How does the consumer’s demand for good x change if his income is held constant? (v) How does the consumer’s demand for good x change if his utility is held constant at the same level? (vi) What are the income and substitution e&ects of the price change from P x = 10 to P x = 20? 1 Question 2: 30 minutes Consider the production function Q = [ aK & + bL & ] 1 =& where Q is output, K is capital, L is labor, and a > 0, b > 0 and 0 < & < 1 are positive constants. Let p denote the price of output, and r , w the prices of the services of capital and labor respectively. When a &rm minimizes its cost, let R = r K= ( pQ ) ; W = w L= ( pQ ) be the shares of capital and labor costs in total cost. Find the cost minimizing conditional demand for inputs of the &rm and show that, as w=r increases, W=R falls. 2...
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