Question
In: Economics
Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M....
Ed's utility from vacations (V) and meals (M) is given by the
function
U(V,M) = V2M. Last year, the price of vacations was $200 and the
price of meals
was $50. This year, the price of meals rose to $75, the price of
vacations remained
the same. Both years, Ed had an income of $1500.
a. Set up a Lagrangian to solve utility maximization problem with
initial
price and find equilibrium.
b. When price of meals increased repeat the a and find
equilibrium.
c. Show both equilibrium in the graph. Place vacation on the
vertical axis
and meals on the horizontal axis.
d. show the compensating variation for price change in meals in the
graph.
e. Calculate compensating variation as numeric number for the
price
change in meals. (Hint: Use expenditure function)
f. Calculatethe equivalent variation as numeric number for the
price
change in meals.
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M....
Ed's utility from vacations (V) and meals (M) is given by the
function U(V,M) = V2M. Last year, the price of vacations was $200
and the price of meals was $50. This year, the price of meals rose
to $75, the price of vacations remained the same. In both years, Ed
had an income of $1500. Calculate the ΔCS, CV, and EV from the
change in meal prices.
Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M....
Ed's utility from vacations (V) and meals (M) is given by the
function U(V,M) = V2M. Last year, the price of vacations
was $200 and the price of meals was $50. This year, the price of
meals rose to $75, the price of vacations remained the same. Both
years, Ed had an income of $1,500. Include a budget line
and indifference curve diagram in your response to this
question.
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