Suppose Mike’s utility function is u(x,y)=2lnx +lny. 1. Derive the demand functions. 2. Is y a...

Suppose Mike’s utility function is u(x,y)=2lnx +lny.

1. Derive the demand functions.

2. Is y a Normal good?

3. Is x an ordinary good?

4. Assume the price of x is initially 1 dollar, and the price of y is also 1 dollar. Given that income is 9, if the price of x doubles to 2 dollars, decompose the change in consumption of x into substitution effect and income effect. Illustrate your answer with a graph.

5. Now, given the price increase in part 4, compute the Compensating variation (CV) and the Equivalent Variation (EV).

Expert Solution

Rahul Sunny answered 2 years ago

1. Suppose Mike’s utility function is u(x,y)=2lnx +lny. a. Derive the demand functions. b. Is y...

1. Suppose Mike’s utility function is u(x,y)=2lnx +lny. a. Derive the demand functions. b. Is y a Normal good? c. Is x an ordinary good? d. Assume the price of x is initially 1 dollar, and the price of y is also 1 dollar. Given that income is 9, if the price of x doubles to 2 dollars, decompose the change in consumption of x into substitution effect and income effect. Illustrate your answer with a graph. e. Now, given...

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Suppose Mike’s utility function is u(x,y)=2lnx +lny. 1. Derive the demand functions. 2. Is y a...

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