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ps4 - ECO 310 Fall 2007 Problem Set 4 Consumer Theory and...

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ECO 310, Fall 2007 Problem Set 4: Consumer Theory and Cost Minimization Due in class on October 23 Question 1 There are two goods, food and clothing, whose quantities are denoted by x and y and prices by p x and p y , respectively. There is a consumer whose income is denoted by I and utility by U . His expenditure function is known to be I = E ( p x , p y , U ) = ( p x ) 1 / 2 ( p y ) 1 / 2 U. (a) Find his Hicksian (compensated) and Marshallian (uncompensated) de- mand functions. (b) Initially I = 100, p x = 1, and p y = 1. What quantities does the consumer buy, and what is his resulting utility? (c) Now the price of food rises to p x = 1 . 21, while income and the price of clothing are as before. What quantities does the consumer buy and what is his resulting utility? (d) Suppose the increase in the price of food was caused by the government levying a tax of 21 percent on food. What is the government’s revenue from this tax? (e) If the government wants to compensate the consumer by giving him some

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ps4 - ECO 310 Fall 2007 Problem Set 4 Consumer Theory and...

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