Question

  

1) Optimization problem

1 Max U(x, y) = x1^0.5 + x2^0.5

s.t. x1 + x2 =16

Find the optimum bundle; check if there is a minimum or a maximum.

2) Give the interpretation of the expenditure
function, explain and show its properties. Draw the
diagram of the expenditure function. Derive the compensated demand function for x1 and x2
E( p, u) = p(p1. p2)^0,5
and the uncompensated demand function.

3) Derive the expenditure function when the direct utility function is
U = 4 ln x1 + x2
st p1 x1 + p2 x2 = I
where
I =100

Find the Compensated demand and calculate CV, EV and CS for good x1


when price changes
from
p1 =1
to
p1 = 4

The price of good x2 is p2=1

Answer 1

Answering only first question is mandatory by HomeworkLib .