Answer Happy

PART A You must answer the question in this section. A.1 Individuals in a market each have a total budget y to spend on two goods q1 and q2 at the prices p1 and p2 respectively. Their preferences are described by the utility function B91 – ] (A – 92)”, if 92 S A; u (91, 92) if q2 > A; = Bq1 where A, B > 0 are preference parameters. (a) Show that the quantity demanded of good 2 is if P2 pi P2 = A - BAR A Bipzig f2 (y, P1, P2) if 0, if $< Assume for parts (b) and (c) that prices are such that individuals consume positive quantities of both goods. (b) Find the expenditure function corresponding to these preferences. (c) Suppose that the price of good 1 is fixed at 1 but the price of good 2 rises from p? to pŻ. Show that compensating and equivalent variation are equal to each other and equal to consumer surplus for each individual. Comment. Henceforth, suppose there are N consumers each with the utility described in equation (1) above, that p1 = 1, and that y > Â. (d) Suppose that the good q2 is supplied by a monopolist with a cost function cQ2 where Q is its total output of good 2. Draw this monopolist's demand, MR and MC curve. Calculate the monopolist's profit-maximizing prices and quantity and compare them with their perfectly competitive equivalent values. (e) Explain why this monopolist does not increase its output without limit as N, the size of its market, increases. Can regulation of the monopolist solve this problem? (f) How much would supply increase (and price fall) if another firm entered this market and the competition was in quantities? (Assume the entrant has the same costs as the incumbent.)