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This questions examines the Lump Sum Principle on subsidies. Consider an indi- vidual with a Cobb-Douglas utility function U(x, y) = x¹/²y¹/2, and faces prices pr, Py with an income of $1. (a) First, find the optimal demand for x and y and compute the indirect utility function, V (Pa, Py, I). (b) Now let. No = 1 and n.. - 4. Use the expenditure function E(p. Dor. U). to calculate

This questions examines the Lump Sum Principle on subsidies. Consider an indi- vidual with a Cobb-Douglas utility function U(x, y) = x¹/²y¹/2, and faces prices pr, Py with an income of $1. (a) First, find the optimal demand for x and y and compute the indirect utility function, V (Pa, Py, I). (b) Now let. No = 1 and n.. - 4. Use the expenditure function E(p. Dor. U). to calculate

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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Only part B. Thank you!

**1\*. Analysis of the Lump Sum Principle on Subsidies** This question explores the Lump Sum Principle in the context of subsidies. Let's consider an individual who has a Cobb-Douglas utility function defined as \(U(x, y) = x^{1/2}y^{1/2}\). This individual faces prices \(p_x, p_y\) and has an income of \(I\). **(a)** First, determine the optimal demand for \(x\) and \(y\), and then compute the indirect utility function, denoted as \(V(p_x, p_y, I)\). **(b)** Given \(p_x = 1\) and \(p_y = 4\), apply the expenditure function \(E(p_x, p_y, \overline{U})\) to calculate the additional income required to raise the individual’s utility from \(\overline{U} = 2\) to \(\overline{U} = 3\).
Transcribed Image Text:**1\*. Analysis of the Lump Sum Principle on Subsidies** This question explores the Lump Sum Principle in the context of subsidies. Let's consider an individual who has a Cobb-Douglas utility function defined as \(U(x, y) = x^{1/2}y^{1/2}\). This individual faces prices \(p_x, p_y\) and has an income of \(I\). **(a)** First, determine the optimal demand for \(x\) and \(y\), and then compute the indirect utility function, denoted as \(V(p_x, p_y, I)\). **(b)** Given \(p_x = 1\) and \(p_y = 4\), apply the expenditure function \(E(p_x, p_y, \overline{U})\) to calculate the additional income required to raise the individual’s utility from \(\overline{U} = 2\) to \(\overline{U} = 3\).
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