Question: A common challenge in empirical economics is dealing with composites o

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A common challenge in empirical economics is dealing with composites of many different goods. Imagine that you are engaged in a study of consumer demand for gold (G), and you would like to define preferences over gold and the consumption of all other goods (AOG). Explain, in detail, how we might think about composite AOG in the utility function U: R2 -> R such that we have U=(G,AOG) [rather than the usual U: RN-> R, where N is the total number of goods consumed]. What restrictions would we have to place on preferences, over all goods, for the treatment to be valid and consistent?

I have troubles figuring out what a composite good is.
please, explain how you got the solution to your answer.

5. Essay Question A common challenge in empirical economics is dealing with composites of many different goods. Imagine that you are engaged in a study of consumer demand for gold (G), aud you would like to define preferences over gold and the consumption of all other goods (AOG). Explain, in detail, how we might think about the composite AOG in the utility function U : R2 R such that we have U-U(G, AOG) rather than the usual U : RR, where N is the total number of goods consumed. What restrictions would we have to place on preferences, over all goods, for the treatment to be valid and consistent.

Explanation / Answer

First let us say my income is $100 per month. However, my wants are unlimited. As I cannot buy everything I need to restrict my choice to certaing goods. Let us say Food is utmost important. Every packet of bread is costing me $5. I need 12 packs of bread so my $60 is consumed by bread. I have only $40 left. I can buy anything what is under $40. 8 packs of pencils at $5 or 2 pair of socks @ 20.

So all other possible combinations of goods are 'composite goods'.

So budget line for customer is p1x1 + p2x2 = 100

p1= price of good 1

x1= Quantity of good 1

p2= price of good 2

x2= Quantity of good 2.

Now, as explained in the question, customer has to make a choice about gold and other goods provided that this total consumption does not exceed the income. Equation is as explained above, where x1 can be gold and x2 can be composite goods.

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