8.4 (0) Maude spends all of her income on delphiniums and hollyhocks. She thinks that delphiniums and hollyhocks are perfect substitutes; one delphinium is just as good as one hollyhock. Delphiniums cost $4 a unit and hollyhocks cost 85 a unit. (a) If the price of delphiniums decreases to 83 a unit, will Maude buy more of them? What part of the change in consumption is due to the income effect and what part is due to the substitution effect? (b) If the prices of delphiniums and hollyhocks are respectively pa = 84 and p, = $5 and if Maude has $120 to spend, draw her budget line in blue ink. Draw the highest indifference curve that she can attain in red ink, and label the point that she chooses as A. Delphiniums 40 30 20 10 10 20 30 40 Hollyhocks (c) Now let the price of hollyhocks fall to $3 a unit, while the price of delphiniums does not change. Draw her new budget line in black ink. Draw the highest indifference curve that she can now reach with red ink. Label the point she chooses now as B.

8.4 (0) Maude spends all of her income on delphiniums and hollyhocks. She thinks that delphiniums and hollyhocks are perfect substitutes; one delphinium is just as good as one hollyhock. Delphiniums cost $4 a unit and hollyhocks cost 85 a unit. (a) If the price of delphiniums decreases to 83 a unit, will Maude buy more of them? What part of the change in consumption is due to the income effect and what part is due to the substitution effect? (b) If the prices of delphiniums and hollyhocks are respectively pa = 84 and p, = $5 and if Maude has $120 to spend, draw her budget line in blue ink. Draw the highest indifference curve that she can attain in red ink, and label the point that she chooses as A. Delphiniums 40 30 20 10 10 20 30 40 Hollyhocks (c) Now let the price of hollyhocks fall to $3 a unit, while the price of delphiniums does not change. Draw her new budget line in black ink. Draw the highest indifference curve that she can now reach with red ink. Label the point she chooses now as B.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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