Suppose that the preferences of a consumer regarding the consumption of goods q₁ and q2 are represented by function: 1-α U(9₁, 92) = 91 927 where q₁0, 92 ≥ 0, 0 < a < 1. Suppose also that the consumer is endowed with some disposable income Y> 0 and faces prices p₁ and p2 respectively for goods 9₁ and 92. b. Consider a reduction in price P2. Drawing and describing the indifference curves and budget constraint, and referring to the concepts of substitution effect and income effect, report how the quantity demanded of q2 changes when; P2 decreases. c. Consider now the dual problem. Specifically, minimise the expenditure function subject to the consumer achieving a level of utility ū> 0 and derive the Hicksian demands for goods 91 and 92. Report and describe the expression of the minimised expenditure function.

Suppose that the preferences of a consumer regarding the consumption of goods q₁ and q2 are represented by function: 1-α U(9₁, 92) = 91 927 where q₁0, 92 ≥ 0, 0 < a < 1. Suppose also that the consumer is endowed with some disposable income Y> 0 and faces prices p₁ and p2 respectively for goods 9₁ and 92. b. Consider a reduction in price P2. Drawing and describing the indifference curves and budget constraint, and referring to the concepts of substitution effect and income effect, report how the quantity demanded of q2 changes when; P2 decreases. c. Consider now the dual problem. Specifically, minimise the expenditure function subject to the consumer achieving a level of utility ū> 0 and derive the Hicksian demands for goods 91 and 92. Report and describe the expression of the minimised expenditure function.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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