Problem 1: Suppose two goods are perfect complements and the price of good x increases. (a) Draw indifference curves and budget lines to show the initial and new equilibrium. (12) (b) What is the total effect resulting from the price increase of good x? (c) What is the income effect resulting from the price increase of good x?
Intermediate
Problem 1: Suppose two goods are perfect complements and the price of good x increases. (a) Draw indifference curves and budget lines to show the initial and new equilibrium. (12) (b) What is the total effect resulting from the price increase of good x?
(c) What is the income effect resulting from the price increase of good x?
(d) What is the substitution effect resulting from the price increase of x?
(e) Provide an intuitive explanation for your answers in (b)-(d).
(f) Sketch the consumer’s Marshallian demand curve for good x. Label clearly the points
that you used in deriving your graph and label this curve Dm.
Please answer all the questions. Thanks in Advance.
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