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Unformatted text preview: e in
a change in
. The change in
can be found by applying the envelope theorem to:
( ) [ [ [ is equivalent to 5 University of Toronto, Department of Economics, ECO 204, 2013  2014 Ceteris paribus, the change in Ceteris paribus, the change in Since ( ) due to a small change in is respectively: due to a small change in is respectively: we see that: In words:
( ) (d) Suppose good 1 is a “good” good and that good 2 is a “neutral” good. True or false: a small increase in the minimum
amount of good 2 that the consumer must consume (i.e.
) will definitely lower the consumer’s optimal utility?
Answer:
The UMP is:
( ( ) ) ⏟ [ [ [ 6 University of Toronto, Department of Economics, ECO 204, 2013  2014 ⏟ ⏟ [ [ [ Let’s suppose good 1 is a “good” good so that
. Rearrange the first FOC, isolate , and noting that all
pecuniary parameters are assumed to be strictly positive and that (from the KT conditions)
we have:
⏞ ⏞ Next, suppose good 2 is a “neutral” good so that
. Rearrange the second FOC, isolate
pecuniary parameters are assumed to be strictly positive we have: , and noting that all ⏞ This expression is, of course, also positive (how do we know?...
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 Winter '13
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