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Practice Questions 4

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Practice Questions 4

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Deniz
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Econ 203 Practice Questions 4

Çağla Ökten

1 1
1. Selin’s preferences over goods x,y are represented by 𝑈(𝑥, 𝑦) = (𝑥 2 + 𝑦 2 )2
Let Px, Py and I denote price of good x, price of good y and income respectively.
a. Find Marshallian demand function for good x and demand function for good y.
b. Find the indirect utility function V(Px,Py,I)
c. Show that indirect utility function you found in part b is homogeneous of degree
zero. Provide intuition for your result.
d. Find compensated demand function and the expenditure function E(Px,Py,U).
e. Show that expenditure function you found in part d is homogeneous in degree 1
f. What is the relationship between the indirect utility function V(Px,Py,I) you found
in part b and the expenditure function E(Px,Py,U) you found in part d? >

2. Consider the utility function of fixed proportions (perfect complements) U=min(x,4y).


Let Px, Py, I denote price of x, price of y and income respectively.
a. Find demand function for good x and demand function for good y.
b. Find indirect utility function.
c. Find the expenditure function.

3. Utility function is given by 𝑈(𝑥, 𝑦) = 𝑥  𝑦  where >0, >0; +=1.


a. Find Marshallian demand function.
b. Find indirect utility function.
c. Find the compensated demand function and expenditure function.
d. Draw the Marshallian and compensated demand function.
e. What is the effect of a price increase on Marshallian demand function? Can you
decompose this effect into substitution and income effects? You can assume
==0.5 if it will make derivation easier.

4. Utility function is given by U(x,y)=xy+y.

a. Find the Marshallian/uncompensated demand functions for x and y.


b. Find the Hicksian/compensated demand functiond for x and y.

5. When will the Marshallian (uncompensated) price elasticity of demand and Hicksian
(compensated) price elasticity of demand be quantitatively similar for a normal
good? Explain.

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