The objective of this exercise is to derive a demand function from the model of the consumer;… 1 answer below »
Exercise 1 (30 points)The objective of this exercise is to derive a demand function from the model of consumer; that is,replicate what we did in class. Your task is to explain where the demand function comes from. Youneed to start with the model of consumer (budget line, indifference map). Then, you change the priceof a good you are analyzing (good X) to determine the quantity demanded. You finish with a demandfunction.There are two components of this exercise: graphical analysis and description. Prepare the relevantgraphical analysis and provide description (explain what is happening in the graphs, what you aredoing).Hint: imagine that you are to teach a reader on where the demand function comes from. The readeris not an economist and has little understanding of concepts like budget line, preferences, optimalchoice, and demand function.Exercise 2 (30 points)In this exercise, we study Adam who consumes only two goods, X and Y. In Figure 1, bundle A is Adam’soptimal bundle. (In Exercise 1, you explained how to determine consumer’s optimal bundle.)Then, something has happened, and Adam’s optimal bundle shifted to B (Figure 1). Your task is toexplain what that “something” could have been.In economics, this kind of exercise is called “rationalization” of choice: you are looking for explanationof Adam’s behavior based on the assumption that he is behaving in a rational way. For economists likeme, this is precisely what we do on daily basis in our research.
