Answered: Using indifference curves and budget…

Using indifference curves and budget constraints graphically illustrate the substitution and income effect that would result from a Drop in the price of a good illustrated on the X-axis in two cases:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Marginal Rate of Technical Substitution

MRTS reaches a manufacturer when a part of the product is lowered to sustain the manufacturing level when the other part is extended. It is the level of the quantity that is lowered when one extra volume is used, and the output is unchanged.

Preferences and Utility Analysis

Before understanding what is preference and utility analysis, it is very important to understand the terms preference and utility separately.

Question

Using indifference curves and budget constraints graphically illustrate the
substitution and income effect that would result from a Drop in the price of a good
illustrated on the X-axis in two cases:
Case 1 Normal Good
Case 2 Inferior Good

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Step 1: Introduce the concept of indifference curves and budget constraint.

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Step 2: Illustrate the substitution and income effect.

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explain step by step please
Make a curve of the budget line curve with the Indifference curve, make a separation between the substitution effect and the income effect Continue to make the demand curve decrease
Bunde's preferences are given by the utility function u(x1, x2) = x, + x2. For each of the following cases, decompose the price effects into the substitution and income effects using the Hicks-Allen decompositions. (For each part, use the given template to draw the constraints, and then use your completed graph to fill in the description. Enter any points in order from left to right as they would appear on the graph.) 20 15 10 5 10 15 20 (a) Suppose m = 120, P1 = 10, and p2 = 15. The price p1 then falls to 6, keeping p2 and m fixed. Given m = 120 and p, = 15, the budget B° is drawn for p, = 10. The utility-maximizing point on this budget is at A = given the linear preferences yielding utility y° = When p, falls to 6, the new budget is B" and the utility-maximizing point is C = ), yielding utility un = . The movement from A to C is the price effect of units of good 1. Removing income incrementally until Bunde can barely afford the old utility of at the new prices yields the line which…