Alice enjoys consuming goods x and y. Where (x; y) is the consumption bundle and 0...

Alice enjoys consuming goods x and y. Where (x; y) is the consumption bundle and
0 <a< 1, Alice’s utility is: u(x; y) = x^ay^1-a
(a) Originally, Alice has income m = 16, and faces prices p_x = p_y = 1, and consumes
a bundle at which her utility (subject to her budget) is maximised. Then, p_y
rises to 4. Alice is sadder with the new bundle she chooses, and tells you that her
compensating variation is 16: that is, she would need an extra 16 dollars to be
as happy at the new prices as she was at the old ones. Assuming Alice is telling
you the truth, find a.
(b) Using the information in part (a), find Alice’s equivalent variation.

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Expert Solution

Rahul Sunny answered 1 year ago

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