Exercise 13 : For this exercise replace A with 4. Consider the following demand function: x...

Exercise 13 :

For this exercise replace A with 4. Consider the following demand function:

x ∗1 ( p 1 , p 2 , m ) = A + 2 , p1 (A+m+1)

for values of m > 1.
a. Obtain Income elasticity of demand. Plot the Engel curve for p1 = 1.
b. Is this a normal good?
c. Assuming that preferences are monotonic (then the individual always

spends all its income), use the budget constraint to solve for x∗2 (p1,p2,m). d. The consumer faces the following prices and income level:

prices p1 =1, p2 =1.5 andincome m=5.

Calculate the quantity demanded for goods 1 and 2 at these prices and this income level.

e. Obtain income and substitution effects with Slutsky compensation when the price of good 1 drops to p, =1−A+6

Need help with letter e

Expert Solution

Rahul Sunny answered 1 year ago

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