HW chap 6-12


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Unformatted text preview: this case is U = (X + 1)Y = 36. Esther's own price elasticity of demand: http://e z to.mhe c loud.mc gr a w- hill.c om/hm.tpx? todo= pr intvie wSingle 4/5 1/22/2014 Assignme nt Pr int Vie w Suppose the price of good X is PX and the price of good Y is PY . Also, assume that her income is $M. Then, the tangency between her indifference curve and budget line implies: Substituting for PX X in the budget equation: Therefore, the own price elasticity of demand is: Note that her own price elasticity of demand is 1 for any PY > 0. Since expenditure is maximized when the own price elasticity of demand is 1, her expenditure on Y is the same for any PY > 0. Esther's optimal choice when her income is $20, the price of X is $4, and the price of Y is $4. The tangency between the indifference curve and the budget line implies: The budget equation implies: Therefore, Y = X + 1 = 3. Her utility in this case is...
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This note was uploaded on 01/22/2014 for the course ECO 3352 taught by Professor Ax during the Fall '13 term at Troy.

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