A consumer of two goods has utility u(₁,2)=12. She can purchase each good i = 1,2 at a price of p, dollars per unit. Alternatively, she can buy a discount card for fixed fee of e dollars that allows her to purchase good 1 at a price of p₁/2 dollars per unit. (The discount card has no effect on the price of good 2.) The discount card is of no value to the consumer except insofar as it reduces the price she pays for good 1. Find this consumer's Marshallian demand for each e > 0. Solution: If w 0. Solution: From part (a), this consumer's indirect utility function is 5 (p, u) = max {4P1P2 2P1P2) w² w-cl Using the identity v(p, e(p, u)) = u, this corresponds to e(p, u) = min {2√/P₁P2u, √/2p₁p₂u+c}.

A consumer of two goods has utility u(₁,2)=12. She can purchase each good i = 1,2 at a price of p, dollars per unit. Alternatively, she can buy a discount card for fixed fee of e dollars that allows her to purchase good 1 at a price of p₁/2 dollars per unit. (The discount card has no effect on the price of good 2.) The discount card is of no value to the consumer except insofar as it reduces the price she pays for good 1. Find this consumer's Marshallian demand for each e > 0. Solution: If w 0. Solution: From part (a), this consumer's indirect utility function is 5 (p, u) = max {4P1P2 2P1P2) w² w-cl Using the identity v(p, e(p, u)) = u, this corresponds to e(p, u) = min {2√/P₁P2u, √/2p₁p₂u+c}.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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