Question

Suppose there are two consumption goods and preferences of a consumer can be represented by the following utility function:

d/11027(0 - 1) + 10) = (2x Iz)n
;

a) Derive the Marshallian demand function of this consumer.

b) Calculate and intuitively interpret the elasticity of substitution.

Answer 1

a) The derivation of Marshallian demand function for x1 and x2 is given as follows:

02a21 as Benivation od Marshallian demand foriteon Lagarges aqutin M- P- + (An- (-)2 P- +

M=4t Pesrf and f- 1-d) -1

Pas and M = + M- Σ

M + Σ 11

1-0 + 1-a Fl

t + A-1 A-1 + Σ
b) The elasticity of substitution is (1/(1-p))

This is derived as per the property of CES utility function