10. Assume an individual's preferences are represented by the following indifference map and hehas an income of S400. Which of the following is shown when the price of Good I is $20 and theprice of Good 2 increases from $10 to S16?Note: Even though the price of Good 2 is increasing, the steps to determine the income andsubstitution effects are the same.504540353025201510101520253035404550Good 1Good 2 is a normal good.Good 2 is an inferior good, but not a Giffen good.Good 2 does not satisfy the Law of Demand.• Ignoring the Income Effect, the Substitution Effect will cause the individual to consumemore of Good I.A.B.21C.3None of the above statements are true.D.Good 2

Income = 400 Price of Good1 = $20 Price of Good 2 Originally = $10 Price of Good 2 Changes to = $16…

Answered: 10. Assume an individual's preferences…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Good X is a Giffen good (a good that violates the law of demand). Suppose that the price of Good X increases. Explain the interaction between the substitution effect and incoming effect of this price increase in a diagram with three budget lines and two indifference curves.
9. Income and substitution effects Rajiv and Simone are two friends living in Denver who love to try different restaurants in their city, but have specific preferences regarding venues for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves 1₁ and 12 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $1,000 available to spend on going out to eat, and further, that the price of diner brunch always $10. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. DINER BRUNCHES 0 0 5 6 N | M BC, UPSCALE DINNERS H BC₂ (?
16. Linda consumes two goods: x and y, has preferences that are smooth (utility maximi zation is characterized by the tangency rule), and income Y=$150. If px $25 and py $5, what is the marginal rate of substitution for Linda at her optimal bundle? 5 x 5y 150 + a. -1/2 b. 1/5 C. -3 d. 7/2 e. 5
The initial budget constraint (BC₁) shows the Steins' budget constraint when the price of a fancy dinner is $100. At this price, Larry and Megan would choose to consume five fancy dinners. Suppose that the price of a fancy dinner decreases to $50, shifting their budget constraint to BC₂, which represents a new relative price of five diner breakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to I₁ at point S.) In order to remain as happy as they were before the price decrease-that is, to consume at some point on the same indifference curve as they were on initially (1₁)-the Steins' income spent on fancy dinners and breakfast at diners would now only have to be $ . However, in reality, rather than maintaining their original level of utility, the Steins choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in fancy dinners. On the following table, indicate which point movement represents…
II. Your preferences are represented by the utility function U(x₁, x₂) = (x² − x²)0.5 for x₁ > 0, x₂ > 0, and x² > x².
3. You have an income of $24 per week and the only two goods you consume are apples (x1) and orange juice (x2). The price per apple is $4 and the price of a bottle of orange juice is $3. Suppose that your weekly optimal consumption bundle is 4 bottles of orange juice and 3 apples . a. Illustrate this in a graph using indifference curves and budget lines. Be sure to fully label the graph. b. Write down the conditions for utility maximization and relate this to the graph that you drew. c. Now suppose that the price of apples falls to $2, and I take enough money away from you such that you are just as well off as you were before, will you buy more of fewer bottles of orange juice? Explain why or why not in words and with a graph. (Hint: think about income and substitution effects
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8. In the following diagram, we show one of Jane's indifference curves and her budget line. a. If the price of good X is $100, what is her income? b. What is the equation for her budget line? c. What is the slope of her budget line? d. What is the price of good Y? e. What is Jane's marginal rate of substitution in equilibrium? Good X 40 Good Y
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