Q1. Suppose that Ike is loss averse. In the morning, Ike's stockbroker calls to tell him that he has gained $1000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1000 in taxes. At the end of the day, does Ike feel emotionally neutral since the dollar value of the gain in his stock portfolio exactly offsets the amount of extra taxes he has to pay? Explain.
Q2. Consider the CES utility function U (x, y) = (√x + √y)2
1. Find the expression for the indifference curve and plot an indifference curve for
U = 64.
2. Using the Lagrangian method, find the optimal quantities of X and Y consumed, given Px, Py and I (income).
3. Find whether good X and good Y are inferior or normal.
4. Can you say whether X & Y are substitutes or complements? Explain.