A consumer has an expenditure function E=1.96U(p1)0.6(p2)04. The price of good 1 increases from $2 to $4. The price of good 2 remains constant at $3. Her utility before the price increase was U=20. Utility after the price increase falls to 10. Precisely write down the equation to work out her CV. (You do NOT need to actually punch in those numbers into your calculator..)
A consumer has an expenditure function E=1.96U(p1)0.6(p2)04. The price of good 1 increases from $2 to $4. The price of good 2 remains constant at $3. Her utility before the price increase was U=20. Utility after the price increase falls to 10. Precisely write down the equation to work out her CV. (You do NOT need to actually punch in those numbers into your calculator..)
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.9P
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Transcribed Image Text:Question 3 Consumer Welfare II
1. A consumer has an expenditure function E=1.96U(p,)0.6(p2)0.4. The price of
good 1 increases from $2 to $4. The price of good 2 remains constant at $3.
Her utility before the price increase was U=20. Utility after the price increase
falls to 10. Precisely write down the equation to work out her CV. (You do
NOT need to actually punch in those numbers into your calculator..)
2. Assume 2 goods, X and Y with px-$2 and py=$2 and income is equal to y
which is just sufficient to let you afford to be on the initial indifference curve
below. Add to the following diagram to show the EV when px rises to $4. Be
sure to add all necessary curves, budget lines and intercepts and label
everything. (and make sure you answer is legible...!)
Good Y
Transcribed Image Text:Good Y
Good X
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