Recall that the Cobb-Douglas Utility function U(X,Y) = XaY1-a has the unusual property that the demand for each good depends only on its own price
Therefore, a consumer will always allocate the same proportion of income to each good. Specifically, the demand for X is
X* = aI/px
where I is income and px is the price of X.
a. What is the price elasticity of demand for X?
b. What is the direction of the income effect on X of an increase in px?
a. Using calculus,
∂X/∂px = -aI/px2
Then E = -1. Because a constant proportion of income is devoted to each good, an increase in price will be matched by an equal offsetting proportional decrease in quantity.
b. X is a normal good from the demand equation. Therefore, the income effect from a price increase will be to reduce consumption of X.
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Which of the following is a reason why airline yield management is an effective method to increase revenue?
A) because airlines have successfully induced customers to reveal their resources and preferences by offering them different versions of the product such as business class and coach plane tickets B) because airlines have a monopoly in long-distance carriage C) because a ticket is a contract to transport a specific person, and is not transferable D) because airlines have invested heavily in developing computer models that identify optimal pricing strategies in the various market segments