3. Consider the utility function:u (x1, T2) = ln (1+x1) + ln (1 + x2)With the Marshallian demand function for good 1 and 2:y + P2 – P1, (р, у)2p1y + Pi – P22p2x2 (p, y) And the Hicksian demand function for good 1:x (p,u)P2exp (u) | – 1P1Now derive expressions for the income and substitution effects of a change in p2 on thedemand for x1 and show that they add up to the total effect.

We are going to take the support of Slutsky equation to answer this question.

Answered: 3. Consider the utility function: u…

3. Consider the utility function: u (x1, x2) = In (1 + x1) + In (1 + x2) With the Marshallian demand function for good 1 and 2: y+ P2 – P1 x1 (p, y) 2p1 y+ Pi – P2 2p2 x2 (p, y)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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