JNU SIS 2019 Question 27: Demand theory and elasticity
Suppose (x1∗,x2∗) maximizes utility subject to a budget constraint p1x1+p2x2≤y, where (p1,p2) is the price vector and y is the income. Suppose the budget constraint holds as an equality at consumption bundle (x1∗,x2∗), which yields utility u∗. Then, the consumption bundle that minimizes expenditure subject to attaining at least u∗ level of utility at price vector (p1,p2)
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Suppose (x₁*, x₂*) maximizes utility subject to a budget constraint p₁x₁ + p₂x₂ ≤ y, where (p₁, p₂) is the price vector and y is the income. Suppose the budget constraint holds as an equality at consumption bundle (x₁*, x₂*), which yields utility u*. Then, the consumption bundle that minimizes expenditure subject to attaining at least u* level of utility at price vector (p₁, p₂) (A) results in expenditure equal to y and is (x₁*, x₂*) (B) results in expenditure greater than y and is not equal to (x₁*, x₂*) (C) results in expenditure greater than y and is not equal to (x₁*, x₂*) (D) results in none of the above
Also written as: Suppose (x_1*, x_2*) maximizes utility subject to a budget constraint p_1x_1 + p_2x_2 <= y, where (p_1, p_2) is the price vector and y is the income. Suppose the budget constraint holds as an equality at consumption bundle (x_1*, x_2*), which yields utility u*. Then, the consumption bundle that minimizes expenditure subject to attaining at least u* level of utility at price vector (p_1, p_2)
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
What this question tests
This question is on Hicksian demand, the expenditure function and duality, part of Demand theory and elasticity in Microeconomics.
Compensated demand, the expenditure and indirect utility functions, and the links between them.
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