[Lecture on indirect utility function] 1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function = 40y pp. His income is y=$7500; the price of good 2 changes from p₂ = $4 to p₂ = $3, while p₁ = $1. Is the consumer better off as a result of this price change, worse off, or equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation). (d) The minimum amount of compensation that the consumer would have wanted to forego the price decrease is given by the equivalent variation - this is the WTA value of the price reduction. Write down the algebraic equation which defines the WTA value in this case (you don't need to solve the equation). (e) If you solved the equations in (c) and (d) - you are not asked to solve them - do you expect that the WTA value would turn out to be the same as the WTP value in part (d), larger, or smaller? Explain your reason

[Lecture on indirect utility function] 1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function = 40y pp. His income is y=$7500; the price of good 2 changes from p₂ = $4 to p₂ = $3, while p₁ = $1. Is the consumer better off as a result of this price change, worse off, or equally well off as before? Explain the reason for your answer. (c) The maximum amount that the consumer would have been willing to pay for this price reduction is given by the compensating variation measure. Write down the algebraic equation which defines the compensating variation in this case (you don't need to sole the equation). (d) The minimum amount of compensation that the consumer would have wanted to forego the price decrease is given by the equivalent variation - this is the WTA value of the price reduction. Write down the algebraic equation which defines the WTA value in this case (you don't need to solve the equation). (e) If you solved the equations in (c) and (d) - you are not asked to solve them - do you expect that the WTA value would turn out to be the same as the WTP value in part (d), larger, or smaller? Explain your reason

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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