4. Suppose u = xy.

1. Find the expenditure function.
2. Suppose m = 100, py = 1 and px falls from 1 to .25. Evaluate consumers’ gains in terms of CV?
3. What is EV? Is it larger than CV? Why?
4. Derive the compensated demand curve for x and compare its slope with the ordinary demand curve. Use the method of integration to obtain CV with the same change in price as in (ii)
5. Suppose now that at the same time as the change in px occurs, the price of y increases to 2.25. Is this sufficient to cancel out the advantage of the fall in the price of x? What is the CV for the two price changes?

5. John’s utility function is U(x, y) = min(x, y). He has $150 and the price of x and the price of y are both 1. John’s boss is thinking of sending him to another town where the price of x is 1 and the price of y is 2. The boss offers no raise in pay. John, who understands CV and EV complains bitterly. He says that although he does not mind moving for its own sake and the new town is as pleasant as the old, having to move is as bad as a cut in pay of $A.

He also says he would not mind moving if when he moved he got a raise of $B. What are A and B equal to?

Price: $12.12

Solution: The downloadable solution consists of 7 pages, 512 words.
Deliverable: Word Document