Assignment

A consumer preference is represented by a Cobb Douglass Utility Function of the form:

1 3
U =10 X 14 X 24

Subject to an income constraint of

120=3 X 1+ 5 X 2

Where:
U = utility
X1 and X2 are the two commodities
(a) Derive the partial derivatives of utility with respect to X1, X2 and λ
(b) Use this information to derive the ordinary or Marshallian demand functions for X1 and
X2
(c) Find the utility of the consumer
(d) What is the values of X1, X2 and indirect utility of the consumer if price of X1 doubles?
What compensation is required to mitigate the effect of the increase in price of X1?
(e) Find the values of X1, X2 and indirect utility when income increases by 40%

2. A young connoisseur has $600 to spend to build a small wine cellar. She enjoys two vintages
in particular: A 2001 French Bordeaux (wF) at $40 per bottle and a less expensive 2005
California varietal wine (wC) priced at $8. If her utility is
2 1
U ( W F , W C ) =W 3F W C3 ,

(i) How much of each wine should she purchase?

(ii) When she arrived at the wine store, our young oenologist discovered that the price of
the French Bordeaux had fallen to $20 a bottle because of a decrease in the value of
the euro. If the price of the California wine remains stable at $8 per bottle, how much
of each wine should our friend purchase to maximize utility under these altered
conditions?
(iii) Explain why this wine fancier is better off in part (b) than in part (a). How would you
put a monetary value on this utility increase?