ajaz_204_2013_2014_HW_5

The change in can be found by applying the envelope

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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 . Re-arrange 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 . Re-arrange 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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