1. When a consumer has a Cobb-Douglas utility function given by u(x, y) = xa yb , their demand for good x is given by x∗...
1. When a consumer has a Cobb-Douglas utility function given by u(x, y) = xa yb , their demand for good x is given by x∗ = m/Px (a/a+b) where m is income and Px is the price of good x. Using this demand function, find the formula for this consumer’s price elasticity of demand. Interpret it in words.
Homework Answers
Interpretation
So, The Price Elasticity of Demand is -1
Price Elasticity of -1 means its unitary elastic which means that any change in price will same have the same percentage change in quantity demanded although both the change are in opposite direction as per the Law of demand.
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