Chapters 8. Slutsky Equation 1. Consider the utility function u(x1, x2) = x1x2. Suppose that the...

Chapters 8. Slutsky Equation 1. Consider the utility function u(x1, x2) = x1x2. Suppose that the prices are given 1 for each good and the income is 10. (1) Find out the optimal choice(s). Figure out the utility level at this optimal choice. (2) Suppose now that the price of good 2 increases from 1 to 2. Figure out the value of the bundle that you obtained in (1) under the new prices. Draw the budget set associated with this value and the new prices. (3) Find out the optimal choice(s) given the budget set in (2). (4) Find the optimal choice(s) under the new prices and the initial income of 10. (5) What is the (Slutsky) substitution effect on good 2? What is the income effect on good 2? (6) Consider the utility level you calculated in (1). What is the bundle that gives you the same utility while minimizing the expenditure under the new prices? (7) What is the (Hicksian) substitution effect on good 2? (8) Suppose that the price of good 2 is now given p2 > 0 while the price of good 1 is fixed at 1. Figure out the Marshallian demand curve of good 2. (9) Continuing from (8), figure out the Hicksian demand curve of good 2 associated with utility level 25. (10) Is the Hicksian demand curve from (9) always steeper than the Marshallian demand curve from (9) at x2 = 5 in this example?

Please answer number 5-10 thank you...:)

Expert Solution

Hicksian demnad curve is red color and marshallian demand curve is blue color and hicksian demand curve is always steeper than marshallian demnad curve as hichsian demand curve only accounts for substitution effect whereas marshallian demand curve accounts for both income and substitution effect.

Rahul Sunny answered 1 year ago

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