4. The following data pertain to products A and B, both of which are purchased by Jay. Initially, the prices of the products and quantities consumed are: PA = $10; QA = 3; PB = $10; QB = 7 Jay has $100 to spend. After a reduction in price of B, the prices and quantities consumed are: PA $10; QA = 2:5; PB = $5; QB 15 Assume that Jay maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Jay to put him back on the original indifference curve, he would consume this combination of A and B: QA 1:5; QB = 9 Determine the change in consumption of good B due to the (1) the substitution effect and (2) the income effect using Hicks decomposition.

4. The following data pertain to products A and B, both of which are purchased by Jay. Initially, the prices of the products and quantities consumed are: PA = $10; QA = 3; PB = $10; QB = 7 Jay has $100 to spend. After a reduction in price of B, the prices and quantities consumed are: PA $10; QA = 2:5; PB = $5; QB 15 Assume that Jay maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Jay to put him back on the original indifference curve, he would consume this combination of A and B: QA 1:5; QB = 9 Determine the change in consumption of good B due to the (1) the substitution effect and (2) the income effect using Hicks decomposition.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

4. The following data pertain to products A and B, both of which are purchased by Jay. Initially, the prices of the
products and quantities consumed are: PA = $10; QA = 3; PB = $10; QB = 7 Jay has $100 to spend. After a reduction
in price of B, the prices and quantities consumed are: PA = $10; QA = 2:5; PB = $5; QB = 15 Assume that Jay
maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were
taken away from Jay to put him back on the original indifference curve, he would consume this combination of A and B:
QA 1:5; QB = 9 Determine the change in consumption of good B due to the (1) the substitution effect and (2) the
income effect using Hicks decomposition.

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