Only part C. Thank you! 1*. This questions examines the Lump Sum Principle on subsidies. Consider an indi-vidual with a Cobb-Douglas utility function U(x, y) = x¹/2y¹/2, and faces prices Pa, Pywith an income of $1.(a) First, find the optimal demand for x and y and compute the indirect utilityfunction, V(P, Py, I).(b) Now let p=: 1 and py = 4. Use the expenditure function E(pa, py, U), to calculatethe extra income needed to increase the individual's utility from U = 2 to U = 3.(c) Now estimate the degree to which good x must be subsidized to increase thisperson's utility from U = 2 to U3. How much would this subsidy cost thegovernment? Is the LSP verified in this example?

Utility function : U = x0.5 y 0.5 The utility function is Cobb - Douglas .Budget Constraint : Px…

This questions examines the Lump Sum Principle on subsidies. Consider an indi- vidual with a Cobb-Douglas utility function U(x, y) = x¹/²y¹/2, and faces prices Pa, Py with an income of $1. (a) First, find the optimal demand for x and y and compute the indirect utility function, V(P, Py, I). (b) Now let pr = 1 and Py = 4. Use the expenditure function E(pa, Py, U), to calculate the extra income needed to increase the individual's utility from U = 2 to U = 3. (c) Now estimate the degree to which good x must be subsidized to increase this person's utility from U = 2 to U = 3. How much would this subsidy cost the

This questions examines the Lump Sum Principle on subsidies. Consider an indi- vidual with a Cobb-Douglas utility function U(x, y) = x¹/²y¹/2, and faces prices Pa, Py with an income of $1. (a) First, find the optimal demand for x and y and compute the indirect utility function, V(P, Py, I). (b) Now let pr = 1 and Py = 4. Use the expenditure function E(pa, Py, U), to calculate the extra income needed to increase the individual's utility from U = 2 to U = 3. (c) Now estimate the degree to which good x must be subsidized to increase this person's utility from U = 2 to U = 3. How much would this subsidy cost the

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter6: Demand Relationships Among Goods

Section: Chapter Questions

Problem 6.7P

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