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ajaz_eco204_2009_HW_4 - University of Toronto Department of...

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University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain ECO 204 2009 2010 S. Ajaz Hussain HW 4 Please help improve the course by sending me an e mail about typos or suggestions for improvements _____________________________________________________________________________________ Note: Please don’t memorize these solutions in the expectation that similar questions will appear on tests and exams. Instead, try to understand how to derive the answer as you’ll be tested on techniques and applications, not on memorization. Moreover, tests and exams will cover topics and techniques that may not be in these practice problems. You are urged to go over all lectures, class notes and HWs thoroughly. Question 1 In this question you will practice the CES utility function which is frequently used in economics and finance. The nice thing about the CES function is that it encompasses other utility functions ‐‐ such as the Cobb Douglas, perfect substitutes and complements ‐‐ as special cases. The CES utility function is: ܷ ൌ ൣߙ ܳ ൅ ߚ ܳ ߩ ൌ ሺߪ െ 1ሻ/ߪ ܷ ൌ ቈߙ ܳ ఙ – ଵ
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