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Suppose that a consumer's preferences over two goods, x and y, are represented by a Cobb-Douglas utility function:

U(x,y) = x1-i² yi²

a. Find the expenditure function of the consumer, and the compensated demand functions.

b. Suppose that i² = 1/4 and that initially a consumer is in equilibrium with px = 1,py = 1, I = 100. What are the demands for xand y.

c. What is the minimum increase in income necessary for the consumer to be as well offunder price px = 1, py = 2, as she/he was at prices px = 1, py = 1?

Explain why the percentage increase is smaller than the increase inthe CPI for the consumer that you derived in part c.

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 Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019
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