ps3fall200 - 14.03 Problem Set 3 Due in Class #9 Theory: 1)...

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14.03 Problem Set 3 Due in Class #9 Theory: 1) Suppose that a consumer’s indirect utility is given by V ( P x , P y , I ) = ln I - a ln P x - b ln P y A) What are the uncompensated (“Marshallian”) demand functions d x ( P x , P y , I ) and d y ( P x , P y , I ) ? (Hint: You’ll need to use Roy’s Identity to solve this problem. See p. 161 of Nicholson) B) What is the expenditure function E ( P x , P y , U 0 ) that corresponds to the indirect utility function in (A)? C) What are the compensated (“Hicksian”) demand functions h x ( P x , P y , U 0 ) and h y ( P x , P y , U 0 ) ? 2) Continue with the utility function from problem set #2 where U ( x , y ) = - 1/ x - 1/ y . Let I = 18, P = 1 and P = 4 . x y A) What are the Marshallian demands for x and y (okay to fill in answers from previous problem set)? B) Suppose that the government gives the consumer an income subsidy of 12. What are the Marshallian demands now? C) Suppose that the government instead decides to give an in-kind transfer of 12 units of x that cannot be resold . What are the new consumption levels? D) What utility does the consumer attain at these consumption levels (from part C)? E) What is the minimum expenditure level required to attain the utility level calculated in part D if the consumer was buying the goods on the market at P x = 1 and P y = 4 ? F) What is the cash equivalent of the in-kind transfer, that is, how much would the government need to subsidize a consumer’s income beyond the 18 she started with in order to make her as well off as with the in-kind transfer of 12 units of x ? G) Assume now that
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This note was uploaded on 03/18/2012 for the course ECON 201 taught by Professor Çakmak during the Spring '10 term at Middle East Technical University.

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ps3fall200 - 14.03 Problem Set 3 Due in Class #9 Theory: 1)...

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