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 y- . Substituting into equation , we have x 1 ( p 1 , p 2 ,y ) = f ( p 1 , p 2 , y ) y- y . 1...
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