prob 1 - 1,p 2,y ∂p 1 ∂v p 1,p 2,y ∂y Now ∂v p 1,p...

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There are two commodities. Someone has an indirect utility function v ( p 1 ,p 2 ,y ) = G ± A ( p 1 ,p 2 ) + ¯ y η y 1 - η 1 - η ² Assume that the price of good 2 is fixed at ¯ p 2 and that A ( p 1 , ¯ p 2 ) = Z p 0 p 1 f ( ξ, ¯ p 2 , ¯ y ) for some continuous function f . Derive the consumer’s demand for good 1 and show that it has constant income elasticity equal to η . Answer: Recall that x 1 ( p 1 ,p 2 ,y ) = - ∂v ( p
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Unformatted text preview: 1 ,p 2 ,y ) ∂p 1 ∂v ( p 1 ,p 2 ,y ) ∂y Now ∂v ( p 1 ,p 2 ,y ) ∂p 1 = ∂A ( p 1 ,p 2 ) ∂p 1 =-f ( p 1 , ¯ p 2 , ¯ y ) and ∂v ( p 1 ,p 2 ,y ) ∂y = ¯ y η y-η . Substituting into equation , we have x 1 ( p 1 , ¯ p 2 ,y ) = f ( p 1 , ¯ p 2 , ¯ y )¯ y-η y η . 1...
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This note was uploaded on 12/25/2011 for the course ECON 210A taught by Professor Bergstrom during the Fall '09 term at UCSB.

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