(a) Explain with the help of a diagram the Slutsky substitution effect and the income effect when the price of good, x1 increases. (b) Explain with the help of a diagram, how the Hicks Substitution effect is different from the Slutsky Substitution effect.

(a) Explain with the help of a diagram the Slutsky substitution effect and the income effect when the price of good, x1 increases. (b) Explain with the help of a diagram, how the Hicks Substitution effect is different from the Slutsky Substitution effect.

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 5CQQ

See similar textbooks

Related questions

Q: Assume that the consumer faces a price of $1 for y, and a total income of $120. The price of a…

A: Budget constraint: given the price of 2 goods and consumer’s income. The budget constraint shows…

Q: Q2. You drink only Coffee or Orange juice Price of Coffee Marginal Utility of Coffee (for (dollars…

A: Part a) MU per dollar for coffee = MU of coffee / price of coffee = 60/3= 20.

Q: Tom's monthly budget to spend on eating and drinking is 500 euros. One beer costs 3 euros and a…

A: Budget constraint: 500 = 3B + 2P

Q: Imagine you have a movie streaming platform that offers new movies at the time of release. Your…

A: Marginal utility is the additional utility derived from consuming an additional unit of the good.

Q: Suppose consumer consume two goods. Can both goods be inferior? Can one of the goods be inferior?…

Q: A. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 (completeness,…

A: The concept that depicts when one good could in turn be used in place of another good providing the…

Q: Jerry spends his entire budget on bread and gasoline. His preferences are complete, transitive,…

A: Substitution Effect: This refers to the change in quantity demanded of a good or service as a result…

Q: Alesandro purchases two goods, X and Y, and the utility gained for the last 3 unit purchased of each…

A: When an individual is consuming two products in the market, the consumer equilibrium is the…

Q: 1.There are two goods F and C. Let MU and P denote marginal utility and price of each good.…

A: Price effect consists of income effect and substitution effect. Substitution effect is always…

Q: In the diagram on the right the consumer's original budget line is L, and the consumer buys the…

A: In economics, the term substitution effect refers to a situation in which sales of a good will…

Q: For a small change in px, use the Slutsky equation to find the substitution and income effects for…

A: The change in demand due to a change in purchasing power of a good is income effect. The…

Q: Graphically decompose the impact of a price increase into the substitution effect and the income…

A: The income effect and the substitution effect are combined to create the price effect. Although the…

Q: 1. Calculate the marginal rate of substitution for the following utility functions: (a) u(x₁, x₂) =…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want…

Q: 2a) Sompa's utility function for strawberries and grapes is given by U (S, G) =10S?G. Where S…

A: Hi! Thank you for the question. As per the honor code, We’ll answer the first question since the…

Q: Marty purchases two goods, food and clothing. He has a diminishing marginal rate of substitution of…

A: Normal goods refer to those goods whose demand increases with the increase in the income of the…

Q: You drink only Coffee or Orange juice Price of Coffee (dollars per cup) Marginal Utility of…

A: As per guidelines, we will answer the first three subpart questions. a. Marginal utility per dollar…

Q: a good is normal, then an increase in the price of the good will lead to which of the following to…

A: We are approached to consider the effect of a price increase on a normal good within a two-good…

Q: a) Explain the nature of an indifference curve map, making reference to the graph below. QUANTITY…

A: Introduction The indifference curve shows that a consumer is indifferent to the combination of two…

Q: 1) You are hired by the government to evaluate the impact of a policy change that affects one group…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Sally consumes two goods, X and Y. Her utility function is given by the expression U = 3XY². The…

A: An indifference curve depicts the combination of two products in several quantities that gives an…

Q: For the Cobb-Douglas utility function: the income and substitution effects are necessarily the same…

A: The Cobb-Douglas utility function is given by: U(X,Y) = X^a * Y^b where X and Y are the quantities…

Q: The utility function is x+min(6.y). Income is 12, price of good x is 3. Price of good y decreased…

A: SUBSTITUTION EFFECTS- It means the change in the number of goods with respect to a change in the…

Q: 1. Good X is a Giffen good (a good that violates the law of demand). Suppose that the price of Good…

A: A Giffen good is a rare type of inferior good where an increase in the price of the good leads to an…

Q: Harry consumes 2 goods, X and Y and he spends N$60 per month. The price of good X is N$4 and the…

A: “Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…

Q: If consumers buy less of a commodity when their incomes rise, this commodity is ( an inferior good…

A: In the market, the change in the consumers buying decision depends upon two types of price effect,…

Q: If we have the utility function, U(x)=(x−7)^2, and we know that there is an indifference set around…

A: The utility function estimates the government assistance or fulfillment of a shopper as a function…

Q: 1.6) The marginal rate of substitution (MRS) can be defined as: Select one or more: a. The amount…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Suppose utility can be measured by "utils" and that Jim buys both coffee and bagels. The price of…

A: Marginal utility refers to additional utility gained from consuming an additional unit of the good.

Question

Suppose a consumer consumes only two goods, x1 and x2 and both goods are normal goods.

8 points

(a) Explain with the help of a diagram the Slutsky substitution effect and the income effect when the price of good, x1 increases.

(b) Explain with the help of a diagram, how the Hicks Substitution effect is different from the Slutsky Substitution effect.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

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.
2)Ben is choosing between cookies and soda. Denote the marginal utility of cookies is MUc, and the marginal utility of soda is MUs. Which of the following relationship is true regarding the marginal utility of substitution (MŘS) of cookie in terms of soda? A) MRS= MUc B) MRS = MUS C) MRS = MUS / MUC D) MRS = MUc / MUs
1. a) Explain the nature of an indifference curve map, making reference to the graph below. QUANTITY (APPLES) 11 12 13 B QUANTITY (ORANGES) b) Show on the graph how a consumer could reach an equilibrium at point A with a given budget constraint. c) Show on the graph how this equilibrium would change if the price of oranges decreased. d) Identify on the graph the income and substitution effects of the price change, and explain the nature of these effects.
6
Imagine you have a movie streaming platform that offers new movies at the time of release. Your market research has revealed the following about your typical consumers’ satisfaction from watching movies: Number of movies (per month) Total Utility or Satisfaction 0 0 1 25 2 47 3 66 4 82 5 94 6 105 The maximum number of movies the consumer watches in a month is 6. (a) Construct a third column for this table to derive “Marginal Utility” corresponding to the number of movies watched. Explain in words what this concept means and why it is important to derive the marginal utilities in pricing.
2. Consider a consumer with Cobb-Douglas utility function U(2,) = a +5
Suppose utility can be measured by "utils" and that Jim buys both coffee and bagels. The price of coffee is $2 and the price of a bagel is $3. If Jim is currently consuming coffee and bagels such that the marginal utility from the last cup of coffee consumed was 6 utils and the marginal utility from the last bagel consumed was 12 utils, is Jim maximizing utility? Why or why not? If not, what should Jim do? Explain in detail.
i) Marginal Utility graphs Q2. You drink only Coffee or Orange juice Price of Coffee Marginal Utility of Coffee (for (dollars per cup) 1st cup) Price of Orange Marginal Utility Juice (dollars per glass) of Orange Juice (for 1 glass) $3 60 $2 50 a) Calculate the MU per dollar for Coffee b) Calculate the MU per dollar for Orange Juice c) If you have 1 cup of Coffee and 1 glass of Orange juice, are you in Equilibrium? Explain briefly. d) If not, how should you change your consumption of these 2 items?
Questions a) b) and c)
2. Sally consumes two goods, X and Y. Her utility function is given by the expression U = 3XY². The current market price for X is £10, while the market price for Y is £5. Sally's current in come is £500. (a) Sketch a set of two indifference curves for Sally in her consumption of X and Y. (b) Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. (c) Determine the X,Y combination which maximises Sally's utility, given her budget constraint. (d) Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What will happen to her utility as a result of the price increase?
Please answer fast
Jerry spends his entire budget on bread and gasoline. His preferences are complete, transitive, monotonic, and convex. For Jerry, bread is an inferior good that follows the law of demand. Moreover, his cross-price elasticity of demand for gasoline with respect to the price of bread is negative. Suppose the price of bread increases, all else constant. a. Create a chart to show the total, income, and substitution effects on bread and gasoline of the increase in the price of bread. b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to label each effect on your graph (or through the chart from part a) and plot bread on the x-axis and gasoline on the y-axis