3. Consider the utility function given by u (x1, x2) x1x2, and budget constraint given by P1x1 + P22 = w. (a) Find the optimal consumption bundle. (b) Find the wealth effect for each good. Is each good normal or inferior? (c) Graph the Engel curve for good 1.

3. Consider the utility function given by u (x1, x2) x1x2, and budget constraint given by P1x1 + P22 = w. (a) Find the optimal consumption bundle. (b) Find the wealth effect for each good. Is each good normal or inferior? (c) Graph the Engel curve for good 1.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter5: Income And Substitution Effects

Section: Chapter Questions

Problem 5.14P

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Question

bundle on the boundary OI the
Irasian buuget set? Explain.
3. Consider the utility function given by u (x1, x2)
x1x3, and budget constraint given by
P1x1 + P2x2 = w.
(a) Find the optimal consumption bundle.
(b) Find the wealth effect for each good. Is each good normal or inferior?
(c) Graph the Engel curve for good 1.
(d) Derive the wealth expansion path.
(e) Derive the offer curve for each good.
(f) What is the MRS? Explain why this example will demonstrate strictly convex indifference
curves.
(g) Find the indirect utility function v (p, w).

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