A consumes two goods, x and y. A ’s utility function is given by u(x, y)...

A consumes two goods, x and y. A ’s utility function is given by u(x, y) = x 1/2y 1/2

The price of x is p and the price of y is 1. A has an income of M.

(a) Derive A ’s demand functions for x and y.

(b) Suppose M = 72 and p falls from 9 to 4. Calculate the income and substitution effects of the price change.

(c) Calculate the compensating variation of the price change.

(d) Calculate the price elasticity of demand for x.

Expert Solution

Rahul Sunny answered 2 years ago

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