CHAPTER 6 Household Behavior and Consumer Choice 127E8. Decide whether you agree or disagree with each of the followingstatements and explain your reason:a. If the income effect of a wage change dominates the substitu-tion effect for a given household and the household workslonger hours following a wage change, wages must have risen.b. In product markets, when a price falls, the substitution effectleads to more consumption; but for normal goods, theincome effect leads to less consumption.9. Suppose the price of X is $5 and the price of Y is $10 and a hypo-thetical household has $500 to spend per month on goods X and Y.a. Sketch the household budget constraint.b. Assume that the household splits its income equally betweenX and Y. Show where the household ends up on the budgetconstraint.c. Suppose the household income doubles to $1,000. Sketch thenew budget constraint facing the household.d. Suppose after the change the household spends $200 on Yand $800 on X. Does this imply that X is a normal or an infe-rior good? What about Y?10. For this problem, assume that Joe has $80 to spend on booksand movies each month and that both goods must be purchasedwhole (no fractional units). Movies cost $8 each, and books cost$20 each. Joe's preferences for movies and books are summa-rized by the following information:MOVIESBOOKSNO. PERNO. PERMONTHTUMU MU/$ MONTHTUMU/S501222802423100352411045760511656121662712363of fras Fona. Fill in the figures for marginal utility and marginal utility perdollar for both movies and books.b. Are these preferences consistent with the law of diminishingmarginal utility? Explain briefly.c. Given the budget of $80, what quantity of books and whatquantity of movies will maximize Joe's level of satisfaction?Explain briefly.d. Draw the budget constraint (with books on the horizontalaxis) and identify the optimal combination of books andmovies as point A.e. Now suppose the price of books falls to $10. Which of theis columns in the table must be recalculated? Do the requiredrecalculations.ref. After the price change, how many movies and how manybooks will Joe purchase?g. Draw the new budget constraint and identify the new opti-mal combination of books and movies as point B.h. If you calculated correctly, you found that a decrease in theprice of books caused Joe to buy more movies as well asmore books. How can this be?1917 1|||||||MUTITTE| | | | | | |

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8. Decide whether you agree or disagree with each of the following statements and explain your reason: a. If the income effect of a wage change dominates the substitu- tion effect for a given household and the household works longer hours following a wage change, wages must have risen. b. In product markets, when a price falls, the substitution effect leads to more consumption; but for normal goods, the income effect leads to less consumption.

8. Decide whether you agree or disagree with each of the following statements and explain your reason: a. If the income effect of a wage change dominates the substitu- tion effect for a given household and the household works longer hours following a wage change, wages must have risen. b. In product markets, when a price falls, the substitution effect leads to more consumption; but for normal goods, the income effect leads to less consumption.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The substitution effect of an increase in the wage rate will: O always lead to a decrease in the quantity of labor supplied. O always lead to an increase in the quantity of labor supplied. O lead to an increase in the quantity of labor supplied only if leisure is a normal good. O lead to an increase in the quantity of labor supplied only if leisure is not a normal good. O lead to an increase in the quantity of labor supplied only if the income effect works in the same direction.
2. Julian buys plants and flowers every month. Both are normal goods. When the price of flowers fell, Julian purchased fewer plants. Explain what the income effect and substitution effect predict when the price of flowers falls. Which effect was stronger for Julian?
The price of food increased during the past year. • Discuss why the law of demand applies to food as it does to other goods and services. • Discuss how the substitution effect influences food purchases when the price of food rises and other things remain the same. • Discuss how the income effect influences food purchases and provide some examples of the income effect.
In terms of our shift variables of demand and supply, how are each of the following pairs related? Which side of the market for the second good (supply or demand) is affected by the change in the price of the first good. d. crackers and peanut butter e. cotton and dress shirtsf. neckties and dress shirts g. leather and shoesh. socks and shoes
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
Chapter 7 i 3:06 BO ☐ The substitution effect. Multiple Choice is generally so weak that its effect cannot be predicted. for an increase in the relative price of a good is sometimes positive but sometimes negative. refers to the change in the quantity demanded of a good due to a change in its relative price. measures the change in the quantity of a good demanded brought about by a change in real income associated with a change in the price of the good. 60 Saved SEP 6