A consumer has utility u(x₁, x₂) = x₁ + x1x2. Suppose that, because of a shortage of good 1, the government imposes a strict upper limit of ₁ on the quantity of good 1 that the consumer can consume. Assume throughout the following that w > p2. (a) Show that the consumer's preferences are strictly convex. Since preferences are monotone, this implies strict convexity. (b) Find the consumer's Marshallian demand if the consumer cannot violate the government limit. (c) Find the consumer's expenditure function.
A consumer has utility u(x₁, x₂) = x₁ + x1x2. Suppose that, because of a shortage of good 1, the government imposes a strict upper limit of ₁ on the quantity of good 1 that the consumer can consume. Assume throughout the following that w > p2. (a) Show that the consumer's preferences are strictly convex. Since preferences are monotone, this implies strict convexity. (b) Find the consumer's Marshallian demand if the consumer cannot violate the government limit. (c) Find the consumer's expenditure function.
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.12P
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