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Author Question: Lewis has preferences given by the Cobb-Douglas utility function U(q1,q2 ) = q1aq21-a, where a > ... (Read 108 times)

rl

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on: Jul 1, 2018
Lewis has preferences given by the Cobb-Douglas utility function U(q1,q2 ) = q1aq21-a, where a > 0. Show that Lewis's total amount spent on each good, does not change with the prices.
 
  What will be an ideal response?

Question 2

The Cobb-Douglas production function for a beer manufacturer is q=1.52L0.6K0.4. If we assume that the firm's capital is fixed at 250 units and the rental rate of capital is 5 per unit, then average fixed cost is
 
  A) 1250.
  B) 1250/q.
  C) 1.52L0.6(250)0.4.
  D) Unable to determine with information given.


Jbrasil

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Reply #1 on: Jul 1, 2018
Answer to Question 1

The demand equations are
q1 = aY/p1 and q2 = (1-a)Y/p2
The total expenditure on q1 is p1q1 = aY and the total expenditure on q2 is p2q2 = (1-a)Y. Thus, the total expenditures are not a function of the price.

Answer to Question 2

B


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