Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 21, Problem 12PA
To determine
The income and substitution effects of normal and inferior goods.
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The goods in the next question are not ale and bread. To solve this question, you are going to have to evaluate the condition The price p is defined for you, but you will have to define the marginal rate of substitution for yourself. What ratio of marginal utilities should you use? You will know the answer to this question once you have defined the marginal rate of substitution – that is, decided which good is being given up and which good is being given in compensation. When making this decision, remember that both sides of this equation refer to the same kind of trade. The right-hand side describes the rate at which one good can be traded for the other in the marketplace; and the left-hand side describes the rate at which someone is willing to trade that good for the other. Thus, the definition of the price determines the manner in which the marginal rate of substitution must be defined. Pierre lives on red wine and blue cheese. His utility function is. where w is his…
The average cost of living is approximately the same in the following three cities in the United Kingdom: Nottingham, Manchester, and Bristol. Use the information you have learned about marginal utility and the substitution effect to explain whether you believe your purchasing choices would remain the same in each of these cities. Assume that your income would be the same in each city.
Chapter 21 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QR
Ch. 21 - Prob. 7QRCh. 21 - Prob. 1QCMCCh. 21 - Prob. 2QCMCCh. 21 - Prob. 3QCMCCh. 21 - Prob. 4QCMCCh. 21 - Prob. 5QCMCCh. 21 - Prob. 6QCMCCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PACh. 21 - Prob. 13PA
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- Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?arrow_forwardIf consumers buy less of a commodity when their incomes rise, this commodity is ( an inferior good , or a normal good ) ? . When the price of this commodity rises, the substitution effect is ( negative or postive) and the income effect is ( negative or postive) ? . So the net result for consumption of this commodity ( depends on which effect dominates , is an increase , is a decrease) ? .arrow_forwardSuppose that a decrease in solar panel prices leads to an increase in a consumer’s demand for solar panels. How could you decompose the increase in demand into an income and substitution effect?arrow_forward
- Why do we decompose the price effect into income and substitution effects?arrow_forwardA consumer has $300 to spend on goods X and Y. The market prices of these two goods are Px = $15 and Py = $5. Draw the budget constraint for X and Y. Suppose the income increases by $300. How does this increase in income affect the budget line and the market rate of substitution between goods X and Y? Draw a shift on the same graph of what happens to the budget constraint line when the price of good Y increases to $10. How does this change in the price of good X affect the market rate of substitution between goods X and Y?arrow_forwardTimothy has a utility function that depends on the number of musicals and the number of operas seen each month. His utility function is given by , where x is the number of musicals per month and y is the number of operas seen per month. Provide a careful reasoning for each of the following questions. Does Timothy believe that more is better for each good? ) Does Timothy have a diminishing marginal utility for each good? Does the absolute value of marginal rate of substitution of x for y diminish?arrow_forward
- What is the “Income Effect”? What is the “Substitution Effect”? Explain the relationship between these twoarrow_forwardCori eats eggs and toasts for breakfast and insists on having three pieces of toast for every two eggs she eats. What is her utility function? If the price of eggs increases but we compensate Cori to make her just as "happy" as she was before the price change, what happens to her consumption of eggs? Draw a graph and explain your diagram. Does the change in her consumption reflect a substitution or an income effect?arrow_forwardTom has the following utility function: U = FC2 where F is food and C is clothing. Show that Tom’s Marginal Rate of Substitution is given by the expression, MRS = C/2F Does Tom’s Marginal Rate of Substitution stay constant as he moves down along one of his indifference curves? Explain your answer clearly. Suppose the price of food is €1 per unit and the price of clothing is €3 per unit and that Tom’s income is €36. Calculate the number of units of food and clothing that Tom consumes. Partial units are possible.arrow_forward
- Carlos is originally consuming his optimal consumption bundle of cell phones and gasoline when the price of gasoline falls. Assume that both gasoline and cell phones are normal goods. How will a decrease in the price of gasoline affect your consumption of cell phones and gasoline? Explain using the substitution and income effects.arrow_forwardCertain individuals have been observed to increase their consumption of goods whenever their price increases. So, for instance, the consumption of product X by some people increases as its price increases. Provide an economic analysis of this phenomenon using income and substitution effects (Illustrate your answer with diagram).arrow_forwardIn economics, we have learned that related goods’ price does matter. Given the budget constraint and everything else remains the same, an individual consumer switches to relatively cheaper goods (also known as substitution effect). Often when you visit a chemist shop with your doctor’s prescription, your pharmacist may ask whether you are interested in buying a relatively cheaper drug (which is biologically equivalent to your prescribed drug) if it is available. what seems to be a problem that may arise when one switches to a cheaper drug.arrow_forward
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