Calvin is back. He still spends all his income on books and other things, Y, and the following graph represents a set of his convex indifference curves representing his preferences for books and other things. 350 Q of Y 320 310 300 290 280 270 260 250 240 0 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 Q of books SE IE TE a. NOW, Calvin has an income of $180 (in the previous problem he had $240) to spend on books and Y. If the price of books, PB, is $10 and the price of Y, Py, is $1, draw Calvin's budget constraint (BCO) and label his optimal consumption point A. b. At Point A, The opportunity cost of a book is = ID By MUX 90 The MRS for books is =10 Muy 9 Calvin consumes 9 books and 90 Y. c. If the price of books increases to $30/book, label his actual consumption bundle after the price change C, the new indifference curve U₁ and the new budget constraint BC1. After the price change: Calvin consumes 2 books and 60 Y. d. On the graph, use red ink to draw (as carefully as possible) Calvin's budget line that reflects the substitution effect. Label this budget constraint BCH. (Hint: Use the new price ratio to reach the initial indifference curve). Label this intermediate consumption point B. With the substitution effect ONLY: Calvin consumes 4 books and 30 Y. e. Does the substitution effect of the increase in the price of books make him buy more or less books? How many more or less?
Calvin is back. He still spends all his income on books and other things, Y, and the following graph represents a set of his convex indifference curves representing his preferences for books and other things. 350 Q of Y 320 310 300 290 280 270 260 250 240 0 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 Q of books SE IE TE a. NOW, Calvin has an income of $180 (in the previous problem he had $240) to spend on books and Y. If the price of books, PB, is $10 and the price of Y, Py, is $1, draw Calvin's budget constraint (BCO) and label his optimal consumption point A. b. At Point A, The opportunity cost of a book is = ID By MUX 90 The MRS for books is =10 Muy 9 Calvin consumes 9 books and 90 Y. c. If the price of books increases to $30/book, label his actual consumption bundle after the price change C, the new indifference curve U₁ and the new budget constraint BC1. After the price change: Calvin consumes 2 books and 60 Y. d. On the graph, use red ink to draw (as carefully as possible) Calvin's budget line that reflects the substitution effect. Label this budget constraint BCH. (Hint: Use the new price ratio to reach the initial indifference curve). Label this intermediate consumption point B. With the substitution effect ONLY: Calvin consumes 4 books and 30 Y. e. Does the substitution effect of the increase in the price of books make him buy more or less books? How many more or less?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:Calvin is back. He still spends all his income on books and other things, Y, and the following graph
represents a set of his convex indifference curves representing his preferences for books and other things.
Q of Y
350
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170-
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90
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10
BOL
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Q of books
The opportunity cost of a book is
Mux
The MRS for books is
SE
IE
TE
a. NOW, Calvin has an income of $180 (in the previous problem he had $240) to spend on books and Y. If
the price of books, PB, is $10 and the price of Y, Py, is $1, draw Calvin's budget constraint (BCo) and label his
optimal consumption point A.
b. At Point A,
Calvin consumes
9
Muy
A
Rx
?
By
=
10
=
90
=10
9
books and 90 Y.
10
Ula
books and
c. If the price of books increases to $30/book, label his actual consumption bundle after the price change C, the
new indifference curve U₁ and the new budget constraint BC₁. After the price change:
Calvin consumes 2
books and GO Y.
d. On the graph, use red ink to draw (as carefully as possible) Calvin's budget line that reflects the substitution
effect. Label this budget constraint BCH. (Hint: Use the new price ratio to reach the initial indifference curve).
Label this intermediate consumption point B. With the substitution effect ONLY:
Calvin consumes
4
30
e. Does the substitution effect of the increase in the price of books make him buy more or less books? How
many more or less?
The substitution effect of the increase in price of books makes him
buy fewer books, He buys 5 fewer books.
Y.
Transcribed Image Text:f. Draw 3 dashed vertical lines (- - -) on your graph, one from A to the horizontal axis, one from B to
the horizontal axis and one from C to the horizontal axis. Along the horizontal axis, label the income effect, the
substitution effect and the total effect on the demand for books.
g. Fill in the blanks: The income effect of the increase in the price of books on Calvin's demand for
books is the same as the effect of a(n) (increase, decrease)
in his income of $_
How do you know?
h. Does the income effect make him consume more books or less? How many more or less?
i. Can you tell whether books are a normal or inferior good? Can you tell whether Y is a normal or inferior
good? Why or why not?
j. On the graph below, show two points on Calvin's demand curve, d₁. Please label everything.
40
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Price
222299H4NO
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0
1
I
a
Edi
GEE
Q of books
13
17
18
k. How does this demand curve differ from the demand curve that you drew in #2? Does the difference
represent a change in demand or a change in quantity demanded?
1. Can you tell from this demand curve alone if books are a normal or inferior good? FULLY explain!
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