Consider a quasi-linear utility function, U(X, Y) = X1/2 + Y, with some Px and Py...

Consider a quasi-linear utility function, U(X, Y) = X1/2 + Y, with some Px and Py

a. For an interior solution, solve step-by-step for the demand functions of X* and Y*.

b. Under what circumstance would the optimal consumption involve a corner solution for the utility maximization problem?

c. (Now, let Py = $1, I = 24, and suppose that Px increases from $0.5 to $2. Find the Compensating Variation (CV) and the Equivalence Variation (EV). In this example, how is the magnitude of EV in comparison to CV, and why?

Expert Solution

Rahul Sunny answered 1 year ago

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