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Taylor’s preferences for goods x and y are given by the utility ?(?, ?) = ?1/3?1/2....

Taylor’s preferences for goods x and y are given by the utility ?(?, ?) = ?1/3?1/2. Use elasticity of demand to predict what will happen to her consumption of good x if the price of good x decreases by 12%.

a. 0
b. +4%

c. +6%

d. +12%

e. +24%

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Answer #1

The given utility function is a Cobb Douglas function which has constant elasticity of -1.

So when price decreases by 1% quantity demanded increases by 12%

d. +12%- is correct

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