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How do I calculate demand?
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February 3rd, 2007
Suppose utility is given by U = ln(x1)+ 2ln(x2), and prices are given by p1
and p2, and income is given by m.
a. Solve for the demand for x1 and x2 as a function of price and income.
b. What is the price elasticity of demand for x1? What is the income elasticity for x1?
c. Use the demand curve to find the utility maximizing values of x1 and x2 separately
for each income level m=10, m=20, and m=30 when p1=2 and p2=4. Use these
values to help you draw the income offer curve and Engel curves for x1 and x2.
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