1. Andrew is a deeply committed lover of croissants. Assume his preferences are Cobb-Douglas over croissants(denoted by D on the x-axis) and a numeraire good (note: we use the notion of a numeraire good to representspending on all other consumption goods - in this example, that means everything other than croissants - itsprice is normalized such that P = $1). Assuming Andrew's utility function is given by U(C, N) = CN and hisincome is $64 a year, his Marshallian demand for croissants will be Dc (Pc, PN,Y)= The expenditureminimization problem yields his compensated (Hicksian) demand for croissants, his compensated (Hicksian)demand for the numeraire good, and his expenditure function:2PCHc = UC.1/2HN = U(PN) ²1/2= 0 (Pc) ¹/²E (PC, PN,U)= Pc* Hc + PN * HN = 2Ū(Pc * PN)¹/2No need to derive thesefor the assignment, butyou can solve for themon your own if you wantextra practice!a. You've been hired by a government official considering a proposed piece of legislation that would increasethe price of croissants from $1 to $4 while leaving incomes unchanged. Find the original level of utilityAndrew achieved before the price increase, then compute the Compensating Variation for this priceincrease, that is, the minimum amount that Andrew would need to be paid so that he's no worse off afterthe price for a box of croissants rises to $4.b. Draw a rough graph of the Marshallian demand and show the loss of Consumer Surplus that would beassociated with this price increase? Set up the integral that you would use to calculate the loss (no need toactually solve for the area).Now redraw your graph from part (b) and add the compensated demand function for boxes of croissants.Denote both CV and ACS on the graph Identify the difference between CV and ACS and clearly label it.d. What factor causes the divergence between CV and ACS to be large or small? Is the divergence between thetwo significant in this situation? Support your answer with, at most, two sentences and the numerical valuesof the elasticity version of the Slutsky equation (ε = ɛ* — §0).

Utility function : U (C , N ) = C0.5 N0.5Where , C = Crosissants , N = Numeraire good…

Andrew is a deeply committed lover of croissants. Assume his preferences are Cobb-Douglas over croissants (denoted by D on the x-axis) and a numeraire good (note: we use the notion of a numeraire good to represent spending on all other consumption goods - in this example, that means everything other than croissants - its price is normalized such that PN = $1). Assuming Andrew's utility function is given by U(C, N) = CN and his income is $64 a year, his Marshallian demand for croissants will be Dc (PC, PN,Y)=zPC The expenditure minimization problem yields his compensated (Hicksian) demand for croissants, his compensated (Hicksian) demand for the numeraire good, and his expenditure function: 1/2 Hc = U (PN) ² 1/2 Hy = U (Pc) ¹ No need to derive th for the assignment, I you can solve for the

Andrew is a deeply committed lover of croissants. Assume his preferences are Cobb-Douglas over croissants (denoted by D on the x-axis) and a numeraire good (note: we use the notion of a numeraire good to represent spending on all other consumption goods - in this example, that means everything other than croissants - its price is normalized such that PN = $1). Assuming Andrew's utility function is given by U(C, N) = CN and his income is $64 a year, his Marshallian demand for croissants will be Dc (PC, PN,Y)=zPC The expenditure minimization problem yields his compensated (Hicksian) demand for croissants, his compensated (Hicksian) demand for the numeraire good, and his expenditure function: 1/2 Hc = U (PN) ² 1/2 Hy = U (Pc) ¹ No need to derive th for the assignment, I you can solve for the

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter10: Consumer Choice Theory

Section: Chapter Questions

Problem 9P

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