hw3 - utilities are / , / . Find the consumers optimal...

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Homework 3, due Thursday 03/10. Eco 300 Prof. R. Zhao There are three problems and the total points are 30. 1. (10 points) (a) Assume good x is normal. Plot a graph to illustrate the income and substitution effects of an increase in Px , holding Py and I constant. (b) Now suppose x is a Giffen good. Plot a graph to illustrate the income and substitution effects of an increase in Px , holding Py and I constant. Make sure you clearly label the curves and indicate any movements/changes. 2. (10 points) A consumer has a utility function ܷሺݔ,ݕሻൌ 2ሺݔݕሻ ଵ/ଶ . The marginal
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Unformatted text preview: utilities are / , / . Find the consumers optimal choice ( x, y ) as functions of Px, Py , and I . These are the demand functions. 3. (10points) The consumers utility function is U(x, y) = 3x + 2y . Let Px = 2, I = 12 . (a) If price Py is too high, the consumer will not want to purchase any y . Find the lowest price Py at which the consumer ceases to purchase y . (b) What is the demand function for good y (quantity y as a function of Py )?...
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