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  3. 3 problems 1 2 use ces utility functions ie functions...

Question: 3 problems 1 2 use ces utility functions ie functions...

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3) Problems 1, 2 use CES utility functions; i.e functions of the form In Problem 1, δ =-2; in Problem 2, δ + 1/2. If you have worked out Problems 1, 2 you might guess that the key to the question is the sign of the exponent δ (which is also the sign of the utility function). So if a consumer has CES utility function u(x,y) = (assume δ 1, δ 0) show that the consumer finds (a) commodities x, y are substitutes if > 0 (b) commodities x,y are complements if δ < 0 (When 6 - 0 the formal expression for utility doesnt make sense but that is usually viewed as Cobb-Douglas with equal exponents, in which case x, y are neither substitutes nor complements.)

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