Question-1 (Income and Substitution Effect) The graph below shows the optimal bundle (x*,y”) of a consumer when the prices of goods are pr and py. The red line denotes the budget line, and the blue curve denotes indifference curves. m denotes the income level of the consumer. m/Py (x,y) A m/px 1. (x,y) A is the original consumption bundle of this consumer. Using graph, show the optimal bundle when the price of x doubles (i.e., p = 2px). 2. Draw a pivoted budget line. The pivoted budget line crosses the original consumption bundle, A, and has the same slope with the budget line under new prices (PP). 3. Show the optimal consumption bundle on the pivoted budget line. 4. Show and discuss the income and substitution effects using the graph.

Question-1 (Income and Substitution Effect) The graph below shows the optimal bundle (x*,y”) of a consumer when the prices of goods are pr and py. The red line denotes the budget line, and the blue curve denotes indifference curves. m denotes the income level of the consumer. m/Py (x,y) A m/px 1. (x,y) A is the original consumption bundle of this consumer. Using graph, show the optimal bundle when the price of x doubles (i.e., p = 2px). 2. Draw a pivoted budget line. The pivoted budget line crosses the original consumption bundle, A, and has the same slope with the budget line under new prices (PP). 3. Show the optimal consumption bundle on the pivoted budget line. 4. Show and discuss the income and substitution effects using the graph.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter6: Consumer Choice Theory

Section: Chapter Questions

Problem 5SQ

See similar textbooks

Similar questions

Clancy is an accountant who enjoys donuts and muffins. Suppose that the price of donuts increases. As a result, the purchasing power of Clancy's paycheck is diminished. Therefore, he reduces his consumption of all goods, including donuts. This phenomenon is known as the (substitution/income) effect. Show Transcribed Text Show Transcribed Text shift of/movement along at every price /due to a change in price
Labor-Leisure choice. Uses 80 hour maximum work week. Utility = R3C2 R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line. Solve the point of optimization, and label it point A. Draw the indifference curve. Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B. Draw the indifference curve. Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S. Draw the indifference curve. Label it U2 The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.
Q11. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F. Suppose as Case A, Total income is $120 and per unit prices of Food (F) and Cloth (C) are $2 and $10, respectively. a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e (F*,C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space.
Question 36 The rate of market substitution is: The consumer’s marginal utility The consumer’s total utility The slope of the indifference curve The slope of the budget line
The following are correct statements about the Income Effect (IE) and Substitution Effect (SE) coming from an increase in Px, EXCEPT: Question 7 options: I.E. is the result of a decline in Purchasing Power on consumers coming from an increase in Px. S.E. is the result of the substitution for alternative goods that the consumer implement as a result of an increase in Px. If two goods are close substitutes, then SE is stronger than IE. If two goods are complements, then IE is equal in proportion than SE.
Which of the following best describes the income effect? Group of answer choices The price of designer jeans has increased, so the buying power of your income has been reduced. You purchase 2 new pairs of new jeans instead of 3 that year. The bank increases interest rates on savings accounts from .04% to 5%, so you start placing more of your monthly income in that savings account. The gap between the rich and everyone else has gotten bigger. The price of designer jeans has increased, so you have less of an incentive to purchase new jeans. You purchase 3 pairs of chinos instead that year.
At the point of tangency of indifference curve and the budget line: Select one: a. The slope of the supply curve is equal to the slope of the indifference curve. b. The slope of the budget line is equal to the slope of the demand curve. c. The budget line is equal to the indifference curve d. The slope of the budget line is equal to the slope of the indifference curve.
It is proven mathematically that indifference curves are convex due to:(a) rising marginal rates of substitution.(b) the inverse association between the quantity demanded and the price.(c) costs decreasing in value.(d) the marginal rates of substitution being negative.
Q8. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F. Suppose as Case 1, Total income is $100 and per unit prices of Food (F) and Cloth (C) are $2 and $10, respectively. a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e (F*,C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space. d. Now assume a new Case 3, Pc' = $15, holding all else the same as in Case 1, do the same analysis (parts a-c) and contrast your answers to Case 1. For part c, you should draw old (Case 1) and new (Case 3) budget lines/point of optimality.
Q9. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F.Suppose as Case X, Total income is $100 and per unit prices of Food (F) and Cloth (C) are $2 and $15, respectively. a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e (F*,C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space. d. Now assume a new Case Y, Pc' = $10, holding all else the same, do the same analysis (parts a-c) and contrast your answers to Case X. For part c, you should draw old (Case X) and new (Case Y) budget lines/point of optimality.
Suppose the price of A is $20 and the price of B is $10 and that good A is plotted on the horizontal axis. If the price of A doubles and the price of B triples, leaving theconsumer’s income unchanged, the budget line a) will become steeper. b) will become flatter. c) will shift in toward the origin. d) will shift out from the origin.
Q57 Cannabis was legalized in 2017 Canada. Assume that the price of cannabis (C) (measured on the horizontal axis) is $9 per ounce and the price of liverwort (L) (measured on the vertical axis) is $4 per ounce. If the price of cannabis declines to $6 per ounce, the budget line will: Multiple Choice shift inward on the horizontal axis. touch the indifference curve at its inflection point. be unaffected. shift outward on the vertical axis. shift outward on the horizontal axis.