1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p,“ p.. 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 0.60.4 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).
1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility function u = 40y p,“ p.. 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 0.60.4 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).
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 2QFR
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Topic: indirect utility function
i need part a,b,c
Transcribed Image Text:1. (a) What is the indirect function? What does it show? (b) A consumer has an indirect utility
function u = 40y p, p.4. His income is y=$7500; the price of good 2 changes from p2 = $4
-0.6 n0.4
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
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