4.10 Show that if the utility function is homothetic, then ICV IEV {Hint: use the result established in Exercise 2.6.]
4.11 Suppose an individual has Cobb-Douglas preferences given by those in Exercise 4.2.
1. Write down the consumer's cost function and demand functions.
2. The republic of San Serrife is about to join the European Union. As a consequence the price of milk will rise to eight times its pre-entry value. but the price
of wine will fall by fifty per cent. Use the compensating variation to evaluate the impact on consumers' welfare of these price changes.
3. San Serrife economists have estimated consumer demand in the republic and have concluded that it is closely approximated by the demand system derived in part 1.
They further estimate that the people of San Serrife spend more than three times as much on wine as on milk. They conclude that entry to the European Union is in the
interests of San Serrife. Are they right?
