ajaz_204_2013_2014_HW_4

# Use the envelope theorem to derive expressions for

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Unformatted text preview: l get due to, all else equal, a small change in ) ) [ [ [ . Use the envelope theorem to derive expressions for the change in . 2 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 ANSWERS Question 1 (a) A consumer tells you that she perceives Kodak and Fuji camera film rolls as “good” goods, “perfect substitutes”, and as “commodities” (in marketing parlance this means she perceives the two brands to be “identical”). Write down at least 3 utility functions which represent this consumer’s preferences over Kodak (good 1) and Fuji (good 2). Assume that the {( } ) consumption set is Answer Since she perceives these brands as perfect substitutes, we can represent her preferences by the linear utility model: Since she perceives both brands as “good” goods we require that: Since she perceives no difference between the two brands we require: This implies that we can choose any value for such that: Here are 3 utility functions which represent this consumer’s preferences (in what sense?): (b) A consumer tells you that she perceives Kodak and Fuji camera film rolls as “good” goods and “perfect substitutes”. She perceives Fuji to be a slightly better film than Kodak: she has assigned a quality rating of 94/100 for Fuji and 93/100 for Kodak. Write down at least 3 utility functions which represent this consumer’s preferences over Kodak (good 1) and {( } ) Fuji (good 2). Assume that the consumption set is Answer Since she perceives these brands as perfect substitutes, we can represent her preferences by the linear utility model: 3 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 Since she perceives both brands as “good” goods we require that: Since she perceives a slight difference between the two brands we require: Since she has assigned a quality rating of 94/100 for Fuji and 93/100 for Kodak, we could argue that her indifference curve slope is: This makes sense: starting at any bundle on an indifference curve, she is willing to substitute rolls of Fuji for anot...
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