a)
To find:
MRS = 1+r
a)

Explanation of Solution
Given utility function:
Budget constraint :
The above equations are put in Langrange equation:
Taking the fisrt order derivative and equating it to 0.
Divide the above two equations, we get:
Introduction:
b)
To know:
Price eslaticity of
b)

Explanation of Solution
Substitution effect is always negative which implies that any increase in value of
While income effect is positive in case of normal good, so it implies
However,
It is assumed that substitution effect has more impact than income effect, that is,
Introduction: Envelop theorem states that changes in exogeneous variables must be considered for profit maximizing equations, ignoring the change in endogeneous variable.
c)
To ascertain:
Changes in part b due to change in budget constraint.
c)

Explanation of Solution
Budget constraint is given as:
Rearranging the terms:
The above equation is a slope of budget line.
When
Introduction:
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Chapter 17 Solutions
Microeconomic Theory
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