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3. (25 marks) Consider an individual with utility of the form: U(x,y) = x0.75+5y. The price...

3. Consider an individual with utility of the form: U(x,y) = x0.75+5y. The price of good x is px and the price of good y is ­py. The individual faces a budget constraint of M. The marginal utility associated with good x is MUx=0.75x-0.25. The marginal utility associated with good y is MUy=5.

  1. Find the Marshallian demand functions for the individual.
  2. Characterize the income elasticity of demand, the price elasticity of demand, the cross-price elasticity of demand and explain what each represents. (You do not need to calculate each elasticity, just tell me if it is positive or negative.)
  3. Suppose px=­py=1, determine the size of the individual’s budget (M) necessary to consume a positive quantity of x and y.

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Expert Solution

Rahul Sunny answered 1 year ago
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