Question

Consider u(x_{1},x_{2})=x_{1}^{0.5}x_{2}^{0.5},I=300,p_{1}=25,p_{2}=1. If p_{1}decreases from $25 to $9, what is the equivalent variation? Enter a number only, round to two decimals. If money needs to be taken away from the consumer include a negative sign.

8.3 Homework Unanswered 0.5 0.5 Consider u(x1, X2) = xx2,I 25,p2 = 1. If Pidecreases from $25 to $9, what is the 300,p1 equivalent variation? Enter a number only, round to two decimals. If money needs to be taken away from the consumer include a negative sign.

Answer 1

u(x, tz) = xoxo If P, decreases from $25 to $9then of cet new peruie, MRS=1.122 Budget axit X2 = 300 x2 = 300-150 4 x1= 150 16-667 Utility = (16.667) (150) - 4.08 (12.24) = 49.969 In order to gain same Wility at initial price Mes= x = 25 1 X 2 = 25x4] = 49.969 = X X 2 = x 0.5 (asx, jos 49.969= 5 x x,=9.994X₂=249.84 TCE 9.99623)+249.84 = 499.59 Equivaler vanation = 499.59 - 300 Thu = 199.59