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1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p,“ p.. His income is y=$7500; the price of good 2 changes from p2 = $4 to p2 = $3, while p1 = $1. Is the consumer better off as a result of this price change, worse off, or 0.60.4 equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation).

1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p,“ p.. His income is y=$7500; the price of good 2 changes from p2 = $4 to p2 = $3, while p1 = $1. Is the consumer better off as a result of this price change, worse off, or 0.60.4 equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation).

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Topic:  indirect utility function

i need part a,b,c

1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p, p.4. His income is y=$7500; the price of good 2 changes from p2 = $4 -0.6 n0.4 to p2 = $3, while p1 = $1. Is the consumer better off as a result of this price change, worse off, or equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation). (d) The minimum amount of compensation that the consumer would have wanted to forego the price decrease is given by the equivalent variation – this is the WTA value of the price reduction. Write down the algebraic equation which defines the WTA value in this case (you don't need to solve the equation). (e) If you solved the equations in (c) and (d) – you are not asked to solve them – do you expect that the WTA value would turn out to be the same as the WTP value in part (d), larger, or smaller? Explain your reason
Transcribed Image Text:1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p, p.4. His income is y=$7500; the price of good 2 changes from p2 = $4 -0.6 n0.4 to p2 = $3, while p1 = $1. Is the consumer better off as a result of this price change, worse off, or equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation). (d) The minimum amount of compensation that the consumer would have wanted to forego the price decrease is given by the equivalent variation – this is the WTA value of the price reduction. Write down the algebraic equation which defines the WTA value in this case (you don't need to solve the equation). (e) If you solved the equations in (c) and (d) – you are not asked to solve them – do you expect that the WTA value would turn out to be the same as the WTP value in part (d), larger, or smaller? Explain your reason
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