Question 3 Toni gets utility from x1 and x2 and her utility function is U(x1, x2)= 10×1^0.25 x2^0. Toni maximizes her utility subject to her budget…

Question 3  Toni gets utility from x1 and x2 and her utility function is U(x1, x2)= 10×1^0.25 x2^0.75

A.  Toni maximizes her utility subject to her budget constraint. Write down the first order conditions and solve for the ordinary demand functions,

x*1(p1, p2, I) and x*2(p1, p2, I)

B. Toni minimizes her expenditures subject to achieving utility level U . Write down the first order conditions and solve for the compensated demand functions, x1^c (p1, p2, U) and x2^c(p1, p2, U)

C.  Provide a verbal definition of a gross complement. Are x1 and x2 gross complements for for Toni? Take the appropriate derivative to prove your answer.

D. We know that expenditure functions are homogeneous of degree 1 in prices. Provide an intuitive explanation for why this is true and prove that Toni’s expenditure function is homogeneous of degree 1 in prices.

E.  If there is a 5% decrease in income, what will be the percentage change in Toni’s consumption of x1? I am looking for a specific percentage change here. Prove your answer carefully.

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