Re: problem code : 030609MICRO

Posted by vishruti on Jun 05, 2009; 12:50pm
URL: http://discussion-forum.276.s1.nabble.com/problem-code-030609MICRO-tp3017449p3030054.html

ok

to check if the consumer is better off or not

we check the utility in 2 situations

you can see the solution following

X1 = M / 2P1
X2 = M / 2P2
AND P1X1 = P2X2
Now substituting in utility function we get

INDIRECT UTILITY
= {M^2 / 4 P1 . P2 }^1/2
 =  M / 2 {P1 . P2}^1/2

LET M=100  P1 =1 P2 =1

U (A) = 50

NOW INCREASE M BY 5% & P1 BY 10%

U(B)= 105 / 2 {1.1}^1/2

THEN COMPARE TWO UTILITITES BY U (A)< U (B)

BY TAKING U (A)<U (B) WE GET 11000 < 11025
 
THUS THE CONSUMER IS NOT NECCESARILY WORSE OFF

this problem has nothing to do with revealed prefrences