Find the income elasticity for good one

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Reference no: EM131244603

(a) Given a budget constraint p1x1 + p2x2 = I, consider an interior solution to the utility maximization problem. Find the demand function for good one. Then find the price elasticity of demand for good one. Is it elastic or inelastic? What parameters does this elasticity depend on? What does this elasticity tell you about the demand for good one?

(b) Find the income elasticity for good one. What does this tell us about the relationship between income and the amount of good 1 purchased? Under what circumstances does this seem a plausible model of behavior?

Reference no: EM131244603

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