Larry Visits Helsinki Where He Can Consume Only Two Goods

Essay

Larry visits Helsinki where he can consume only two goods, x and y. He has a budget of M and faces prices p_x
and p_y respectively. His utility function is given by: U = A(xy)^1/2 where A is a constant. i)Derive an equation for Larry's demand curve for x. Now let M = 120, px = 3 and py = 1. ii)Calculate his cross elasticity of demand for x with respect to the price of y and calculate his income elasticity of demand for x.
iii)Larry is invited to join the Hulla Hukka Club, for dues of $40 per week, which will allow him to purchase x
at a price of 1. Will Larry join the Hulla Hukka Club?
iv)What is the largest due that Larry would be willing to pay to join the Hulla Hukka Club?