Andrew is a deeply committed lover of croissants. Assume his preferences are Cobb-Douglas over croissants (denoted by D on the x-axis) and a numeraire good (note: we use the notion of a numeraire good to represent spending on all other consumption goods - in this example, that means everything other than croissants - its price is normalized such that PN = $1). Assuming Andrew's utility function is given by U(C, N) = C/N and his income is $64 a year, his Marshallian demand for croissants will be Dc (PC, PN,Y)= The expenditure minimization problem yields his compensated (Hicksian) demand for croissants, his compensated (Hicksian) demand for the numeraire good, and his expenditure function: Y 2PC ¹/2 Hc = 0 (PN)" 1/2 H₂ = U (PC) HN E (Pc, PN,U) = Pc * Hc + PN * Hn = 2Ū(Pc * PN)¹/2 a. You've been hired by a government official considering a proposed piece of legislation that would increase the price of croissants from $1 to $4 while leaving incomes unchanged. Find the original level of utility Andrew achieved before the price increase, then compute the Compensating Variation for this price
Andrew is a deeply committed lover of croissants. Assume his preferences are Cobb-Douglas over croissants (denoted by D on the x-axis) and a numeraire good (note: we use the notion of a numeraire good to represent spending on all other consumption goods - in this example, that means everything other than croissants - its price is normalized such that PN = $1). Assuming Andrew's utility function is given by U(C, N) = C/N and his income is $64 a year, his Marshallian demand for croissants will be Dc (PC, PN,Y)= The expenditure minimization problem yields his compensated (Hicksian) demand for croissants, his compensated (Hicksian) demand for the numeraire good, and his expenditure function: Y 2PC ¹/2 Hc = 0 (PN)" 1/2 H₂ = U (PC) HN E (Pc, PN,U) = Pc * Hc + PN * Hn = 2Ū(Pc * PN)¹/2 a. You've been hired by a government official considering a proposed piece of legislation that would increase the price of croissants from $1 to $4 while leaving incomes unchanged. Find the original level of utility Andrew achieved before the price increase, then compute the Compensating Variation for this price
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 6QFR
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Please explain in detail part a to d.
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