Draw a budget line with good X on the x-axis and Good Y on the Y axis. Graphically illustrate the effect of an increase in the price of good X on the utility maximizing quantity of X consumed. Make sure you identify the income effect and the substitution effect. Assume that the good is a normal good

Draw a budget line with good X on the x-axis and Good Y on the Y axis. Graphically illustrate the effect of an increase in the price of good X on the utility maximizing quantity of X consumed. Make sure you identify the income effect and the substitution effect. Assume that the good is a normal good

Micro Economics For Today

10th Edition

ISBN:9781337613064

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter6: Consumer Choice Theory

Section: Chapter Questions

Problem 14SQ

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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
Use a well labelled diagram and illustrate the consumer equilibrium by drawing a budget constraint and an indifference curve . There will be amount of good X on the x-axis and amount of good Y on the y-axis. Then decrease the price of good X and illustrate the effect of a decrease in the price of good X by dividing the total effect into substitution effect and income effect considering that good X is an inferior good . Explain the meaning of the income and substitution effects of a price change.
explain how utility analysis leads to the law of demand.
(c) When the price of CCC increases from $1 to $8, calculate Maya’s substitution effect and income effect. (d) According to your calculation in part (c), is CCC a normal good or an inferior good? Explain. Is CCC an ordinary good or a Giffen good? Explain.
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Explain three assumptions about the properties of consumers’ preferences.
Suppose two goods coffee and cream provide the consumer with utility but only if they are consumed in fixed proportions. An increase in the price of coffee will yield a substitution effect and an income effect in opposite direction. a substitution effect and an income effect in the same direction. a substitution effect but no income effect. an income effect but no substitution effect
Assume the demand for cherries is elastic and that the producer of cherries increases the price of cherries. As a result? A convex indifference curve implies what type of behavior? If a consumer always wishes to consume peanut butter and jam in fixed proportions, he treats these two goods as if they are? Assume PX= $3 and PY = $6 and income = $30. What is the relative price of an additional unit of good X in terms of the amount of good Y that has to be given up? Assume there are only two goods (X and Y). Assume the relative price of good X, is 2 of good Y. If income doubles, the price of X doubles and the price of Y doubles, what will be the relative price of good Y?
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Present a budget line and a budget set for the consumer of two good X and Y, where the consumer has an income of $3,000 per month. Assume the price of X is 2 and the price of Y is 6. Suppose the price of Y decreases to 4. Show how your budget line changes and use your diagram to explain why the price decrease will make the consumer better off. Add at least two indifference curves, using them to show how the decrease in price will change the optimal choice, assuming the law of demand holds for good Y.
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