Consider a consumer with expenditure function e(p, u) = p2u - √ Suppose that the consumer has wealth 4. Initially, prices are (3,2). (a) What value of a would make the consumer indifferent between a fall in prices to (1,1) with wealth remaining at 4 and an increase in wealth of 2 with prices remaining at (3, 2)? How is this conceptually related to the compensating or equivalent variation? (You do not have to do any additional calculations to answer the second part of the question.) (b) Find the substitution and income effects on Good 1 associated with a marginal increase in the price of Good 2 when prices are (3,2).

Consider a consumer with expenditure function e(p, u) = p2u - √ Suppose that the consumer has wealth 4. Initially, prices are (3,2). (a) What value of a would make the consumer indifferent between a fall in prices to (1,1) with wealth remaining at 4 and an increase in wealth of 2 with prices remaining at (3, 2)? How is this conceptually related to the compensating or equivalent variation? (You do not have to do any additional calculations to answer the second part of the question.) (b) Find the substitution and income effects on Good 1 associated with a marginal increase in the price of Good 2 when prices are (3,2).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.13P

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