2. George has preferences for food X and clothing Y described by a utility function U(X,Y)=XY¹2 a) Find his demand function for food. Assume prices for food and clothing are Px and Py Income is I. b) What is the relationship between the two goods: food and clothing for George? Why? c) On a clearly labeled graph, illustrate the income and substitution effects of the price increase on the consumption of food.

2. George has preferences for food X and clothing Y described by a utility function U(X,Y)=XY¹2 a) Find his demand function for food. Assume prices for food and clothing are Px and Py Income is I. b) What is the relationship between the two goods: food and clothing for George? Why? c) On a clearly labeled graph, illustrate the income and substitution effects of the price increase on the consumption of food.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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a. Determine the demand functions of x and y in the case of a Cobb-Douglas type utility function, in the following cases: α=0.40;β=0.60 Graph the demand functions of the two goods (price as a function of quantity) assuming the individual's income is $500 - Determine what is the quantity demanded of x and y, if the price of good x is USD 1, the price of good y is USD 4, and income is USD 500 - Now, explain what happens to the quantity demanded if the prices of the goods are doubles holding income constant.
5. Your budget is spent on either food or entertainment, both being normal goods. Suppose there is a rise in the price of food. a) In what direction would the substitution effect push the consumption of food? [Hint: The substitution effect measures the effect of what on what? What is the sign of the effect? In which direction has the relative price of food changed? So in what direction will the consumption of food change?] b) In what direction would the income effect push the consumption of food? c) In what direction would the substitution effect push the consumption of entertainment? d) In what direction would the income effect push the consumption of entertainment? e) If you know that consumption of entertainment falls, what would you conclude about the relative magnitudes of the income and substitution effects?
Katie consumes X and Y in fixed proportions: a units of X and b units of Y. To find Katie's demand functions for X and Y, a. set ratio of marginal utilities equal to the ratio of prices and solve together with the budget constraint. cross out b. solve the following two equations: aX=bY and PxX+PyY=I cross out c. solve the following two equations: bX=aY and PxX+PyY=I cross out d. you only need the equation of the budget line cross out e. find the corner solution where Katie spends all her income on the good that gives the highest marginal utility per dollar
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2. Ping receives a weekly allowance to purchase soda (x) and juice (y) at school. His preferences over these two goods can be represented by the utility function U(x,y) =0.5x+ 5lny where x represents the number of cans of soda and y represents the number of juice boxes. a) Given his preferences find his Marshallian demand functions for soda (x) and juice (y). b) Suppose that the price of a can of soda is $1.5 and that Ping has $30 to spend on soda and juice. Write Ping's demand curve for juice (y). Illustrate his demand curve. c) Suppose that the price of a box of juice is $1 (the price of soda and income remain $1.5 and $30, resp.). Use your demand functions to find his best bundle. In an indifference curve diagram illustrate his best bundle at these prices. For the remainder of the question assume that Ping's allowance (income) rises to $36 per week and the prices of the two goods are unchanged at Px= $1.5 and Py= $1. d) Use your demand functions to find his new best bundle. e)…
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1. What information do we gain by isolating the income and substitution effects from each other when examining the effect of a change in price on consumption? How does this further help us understand the characteristics of normal and inferior goods? Using the concepts of the substitution and income effects, how would you define a Giffin good?
32. If the demand of soup increases as the price of bread increases, the two goods would beclassified as:(a) substitutes(b) complements(c) neither substitutes nor complement
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Question #3 Please explain what are the substitution and income effects (a detailed response is expected). Mark consumes two goods apples and oranges. If the price of orange increases from $2 to $4 and orange is an inferior good, please illustrate graphically the income and substitution effects. Please label your diagram carefully and provide explanation. Qd = 3300 – 2P and Qs = 500 + 8p Solve for: Price, Quantity and Market equilibria
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For Sara, ramen noodles are a normal good, however Sean considers ramen noodles to be inferior. If Sara and Sean have the same amount of income, Sean's demand for ramen noodles will be less price elastic than Sara's. Please explain why in detail using the substitution effect and income effect graphs.