in class, we looked at the CV and EV associated with changes in prices. The same measures can be used if wealth also changes; thus, for instance, if prices and wealth change from pº, wº) to (p¹, w¹), then the CV is e(p¹, v(p¹,w¹)) -e(p¹, v(pº, wº)). Consider the expenditure function e(p, u) = U P₁ + P₂ Let initial prices and wealth be pº = (1, 1) and wº = 1 respectively. (a) Find the indirect money-metric utility function e(p, v(p, w)). (b) Evaluate the EV and CV if p¹ = pº (i.e. prices remain the same) and wealth changes from wo to w¹ = 2. (c) Evaluate the EV and CV if prices change from pº to p² = (2, 1) and wealth changes from wo to w²2.5.
in class, we looked at the CV and EV associated with changes in prices. The same measures can be used if wealth also changes; thus, for instance, if prices and wealth change from pº, wº) to (p¹, w¹), then the CV is e(p¹, v(p¹,w¹)) -e(p¹, v(pº, wº)). Consider the expenditure function e(p, u) = U P₁ + P₂ Let initial prices and wealth be pº = (1, 1) and wº = 1 respectively. (a) Find the indirect money-metric utility function e(p, v(p, w)). (b) Evaluate the EV and CV if p¹ = pº (i.e. prices remain the same) and wealth changes from wo to w¹ = 2. (c) Evaluate the EV and CV if prices change from pº to p² = (2, 1) and wealth changes from wo to w²2.5.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:In class, we looked at the CV and EV associated with changes in prices. The same measures
can be used if wealth also changes; thus, for instance, if prices and wealth change from
(pº, wº) to (p¹, w¹), then the CV is e(p¹, v(p¹, w¹))-e(p¹, v(pº, wº)). Consider the expenditure
function
e(p, u) =
=
U
P₁ + P₂
Let initial prices and wealth be pº = (1, 1) and wº = 1 respectively.
(a) Find the indirect money-metric utility function e(p, v(p, w)).
(b) Evaluate the EV and CV if p¹ = pº (i.e. prices remain the same) and wealth changes
from wº to w¹ = 2.
(c) Evaluate the EV and CV if prices change from pº to p² = (2, 1) and wealth changes from
wo to w² = 2.5.
(d) Which of the changes in parts (b) and (c) does the consumer prefer? Explain.
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