Reference no: EM13125613
Please answer "True" or "False" and explain your answer using a graph.
Suppose the price of X goes up and a consumer goes on consuming the exact same amount of X as before. Then X cannot be an inferior good.
Philip's quasilinear utility function is given by U = q10.5 + q2.
a.Derive his demand curve assuming that he consumers some of both goods (interior solution) and that p2 = 1.
b.Discuss how the demand curves depend on his income. Hint: The quantity demanded cannot be completely independent of his income: One cannot buy goods if you have no income.
c.Discuss the substitution, income, and total effect on demand for q1 if its price, p1, increases.
4. A Californian student consumes Internet services (I) and books (B). Her preferences are represented by a Cobb-Douglas utility function, U(I,B)=I0.5B0.5. Initially Y = 100, PI = PB = 1. Lately, however, because of an electricity shortage, the price of the Internet services has increased to 2. The government has decided to give a transfer to the student so that she can recover her initial welfare. In order to determine the transfer the government has hired three consultants who have made the following suggestions:
Consultant A: The transfer should allow the student to buy her initial bundle.
Consultant B: The transfer should allow the student to get her initial level of utility.
Consultant C: The government should give her a transfer of 20.
a.Find the amount of the transfer implied by consultant A. Would the consumer continue to purchase the original utility maximizing bundle? If not, what is the new bundle and what is the level of utility.
b. Find the amount of the transfer implied by consultant B.
c. Determine whether the consumer is better or worse off from Consultant C's suggestion than before the price increases.
5. Ted's uncompensated demand function for bacon is given by Q = 15/p. What is Ted's change in consumer surplus when the price of bacon rises from p = 3 to p = 5?
Please show your work and explain your answer.
6. Ian views playing video games and drinking soda as perfect complements (one soda with one hour of playing video games). Currently, sodas are $1 each and video games costs $1 per hour. Ian has $12 of income.
a.Compute Ian's Compensating Variation if the price of video games rises to $2.
b.Compute Ian's Equivalent Variation if the price of video games rises to $2.
c.Compute Ian's change in Consumer Surplus if the price of video games rises to $2
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