ajaz_204_2013_2014_HW_5

E buy good 2only 12 university of toronto department

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Unformatted text preview: ub this back in: Re-arrange to get the “condition for case C to occur (i.e. buy good 2only): 12 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 Here is an example showing the intuition behind this result: C Case D In this case, both and are nil. Exploiting this fact in the FOCs yields: ⏟ ⏟ Equating the expressions for shows that at the Case D optimal bundle: That is, the indifference curve will be tangent to the budget line slope. The actual amounts of goods 1 and 2 consumed will be found by simultaneously solving these two equations: 13 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 Here is an example showing the intuition behind this result: D Notice that Cases B, C and D are not mutually exclusive: { Note that it is possible for all three cases to occur when as in the following example for linear utility function: 14 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 C D B For utility models other than the linear utility function, when will we have only cases B, C, and D? Here’s the answer: { 15 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 Question 4 Consider a (rational) consumer with a Cobb-Douglas utility function defined over the consumption set {( } Assume that ) Solve the Cobb-Douglas UMP by taking a log positive monoto...
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