380 Problem Set _ 6-expenditure function

380 Problem Set _ 6-expenditure function - c. How much will...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Consumer Choice: Expenditure Functions Problem Set 6 Econ. 380 R. Pope Winter 2011 Graphical 1. Why does a Laspeyres price index like the CPI (consumer price index which keeps the market basket fixed) tend to overstate the cost of living when a price increases. Calculus or at least More Technical Problems 2. Mr. A derives utility from the number of martinis he drinks , U(m)=m. However, he only enjoys martinis made in a particular way: two parts gin (g) to one part vermouth (v). Hence is utility function is U(m)=U(g,v)=min(g/2,v). a. Derive the Indirect Utility Function. b. Derive the expenditure function?
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: c. How much will expenditure increase if the price of gin doubles? d. What happens to expenditures if both the price of gin and vermouth double? 3. For the general Cobb-Douglas utility function, 1 ( , ) , 0 1 a a U x y x y a-= and using , , and for prices and income x y p p I a. Derive the indirect utility function and give its meaning. b. Derive the expenditure function for arbitrary utility level U and give its meaning. b. Give the best intuitive or graphical explanation that you can for why the expenditure function is concave in prices....
View Full Document

This note was uploaded on 04/07/2011 for the course ECON 380 taught by Professor Showalter,m during the Winter '08 term at BYU.

Ask a homework question - tutors are online