On the graph below, the consumer begins at L1. The relative prices change to L2. Complete the table and the sentence below. (Hint: The dashed line is a reference line to show us the income effect. Point B shows only the income effect. The change from A to B is the income effect. The change from B to C is the substitution effect.)Porcupines consumed at ‘A’ Grenades consumed at ‘A’ Porcupines consumed at ‘C’ Grenades consumed at ‘C’ Will consumption of Grenades increase or decrease due to the income effect? Quantity change in Grenades due to income effect Will consumption of Grenades increase or decrease due to the substitution effect? Quantity change in Grenades due to substitution effect Will consumption of Porcupines increase or decrease due to the income effect? Quantity change in Porcupines due to income effect Will consumption of Porcupines increase or decrease due to the substitution effect? Quantity change in Porcupines due to substitution effect * Indicate both the quantity of the change as well as whether it’s an increase or decrease. Why do we expect that indifference curves will never cross? Grenades45352515510BAL130 50 70C90 110L2Porcupines

Substitution effect: The decrease in consumption of the good due to price fall of other goods Income…

Answered: On the graph below, the consumer begins…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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On the graph below, the consumer begins at L1. The relative prices change to L2. Complete the table and the sentence below. (Hint: The dashed line is a reference line to show us the income effect. Point B shows only the income effect. The change from A to B is the income effect. The change from B to C is the substitution effect.)

Porcupines consumed at ‘A’
Grenades consumed at ‘A’
Porcupines consumed at ‘C’
Grenades consumed at ‘C’
Will consumption of Grenades increase or decrease due to the income effect?
Quantity change in Grenades due to income effect
Will consumption of Grenades increase or decrease due to the substitution effect?
Quantity change in Grenades due to substitution effect
Will consumption of Porcupines increase or decrease due to the income effect?
Quantity change in Porcupines due to income effect
Will consumption of Porcupines increase or decrease due to the substitution effect?
Quantity change in Porcupines due to substitution effect

* Indicate both the quantity of the change as well as whether it’s an increase or decrease.

Why do we expect that indifference curves will never cross?

Grenades
45
35
25
15
5
10
B
A
L1
30 50 70
C
90 110
L2
Porcupines

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