Tutorial Week 3

Sergio Currarini

October 18, 2020

 1 2
1. Consider a consumer with utility function u(x1 , x2 ) = x13 x23 . Let in-
come be m = 18 and prices be p1 = 2 and p2 = 1.

(a) Determine the equation of the ordinary demand function and of

the Engel curve for good 1.
(b) Say if goods 1 and 2 are gross complements or gross substitutes.
(c) Say if good 1 is a Gi↵en good.
(d) Compute the optimal solution for this consumer.
(e) Compute for both goods the change in consumption induced by
an increase in the price of good 1 from 2 to 3.
(f) Using the original prices, compute for both goods the change in
consumption induced by an increase in income from 18 to 30.
Compute also the corresponding change in utility.
(g) Using the original prices and income, compute the change in con-
sumption and utility following a doubling of both prices and in-
come.

2. Consider a consumer with perfect complements preferences over to

goods, 1 and 2. With current income and current prices, the consumer
is consuming the bundle (10, 5). Suppose now that the expenditure in
good 1 is larger than the expenditure in good 2. Consider now a change
in prices: the price of good 1 doubles, while the price of good 2 halves.

(a) Is the consumer able to buy the original bundle (10, 5)?
(b) Suppose now that the government wants the consumer to buy
exactly the original bundle. Is there an income transfer (positive
or negative) that would do the job?