ps3_fall2011

# ps3_fall2011 - Department of Economics Columbia University...

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Department of Economics W3211 Columbia University Fall 2011 Probl e m S e t 3 Int e rm e diat e Mi c ro ec onomi c s Prof . S e yhan E Arkona c 1 . S teve’s utility for socks (q 1 ) and other goods (q 2 ) is given by U(q 1 ,q 2 ) = 10q 1 .1 q 2 .9 The price of the composite good is p 2 =1 and the price of a pair of socks is p 1 =2. Steve’s income is Y=100. Every year, Steve’s mom buys him 20 pairs of socks. Find the equivalent variation of the gift. What is the difference between the cost of the gift and the equivalent valuation cash amount? 2 . For each of the following statements, define all of the underlined terms . Then, explain why the statement is true or false . a . If a consumer views two goods as perfect substitutes then their optimal choice will be a corner solution . b . The substitution effect from a price increase states that the consumer will always choose a smaller amount of that good to consume. However, the income effect states that consumption can move in either direction. c

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## This note was uploaded on 01/16/2012 for the course ECON W3211 taught by Professor Elmes during the Fall '09 term at Columbia.

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ps3_fall2011 - Department of Economics Columbia University...

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