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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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1. A consumer has preferences represented by the utility function U(x) E- ,In(x) 'i = 1 where x; denotes the quantity consumed of good i and n> 3. (a) Assuming that the consumer has fixed income y and can buy good i at price p; , find the ordinary and compensated demand elasticities for good 1 with respect to p; , j = 1, .. , n. (b) Suppose that the consumer is legally obligated to purchase an amount A, of good n (e.g. heating oil) where p„An < y. If there are no constraints on the choices of the other n-1 goods, then find the ordinary and compensated demand elasticities for good 1 with respect to p;, j = 1, ... , n. Compare your answers to part (a) above. (c) Now suppose that the consumer is legally obligated to purchase an amount Ak of good k where k = n-r, n and 0 <r< n-2 and EP,AK < y. Use the arguments in parts (a) and (b) %3D above to explain what will happen to the elasticity of good 1 with respect to p; as r increases (i.e. as the number of constraints increases) and comment on the results.
Transcribed Image Text:1. A consumer has preferences represented by the utility function U(x) E- ,In(x) 'i = 1 where x; denotes the quantity consumed of good i and n> 3. (a) Assuming that the consumer has fixed income y and can buy good i at price p; , find the ordinary and compensated demand elasticities for good 1 with respect to p; , j = 1, .. , n. (b) Suppose that the consumer is legally obligated to purchase an amount A, of good n (e.g. heating oil) where p„An < y. If there are no constraints on the choices of the other n-1 goods, then find the ordinary and compensated demand elasticities for good 1 with respect to p;, j = 1, ... , n. Compare your answers to part (a) above. (c) Now suppose that the consumer is legally obligated to purchase an amount Ak of good k where k = n-r, n and 0 <r< n-2 and EP,AK < y. Use the arguments in parts (a) and (b) %3D above to explain what will happen to the elasticity of good 1 with respect to p; as r increases (i.e. as the number of constraints increases) and comment on the results.
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