8.4 (0) Maude spends all of her income on delphiniums and hollyhocks. She thinks that delphiniums and hollyhocks are perfect substitutes; one delphinium is just as good as one hollyhock. Delphiniums cost $4 a unit and hollyhocks cost 85 a unit. (a) If the price of delphiniums decreases to 83 a unit, will Maude buy more of them? What part of the change in consumption is due to the income effect and what part is due to the substitution effect? (b) If the prices of delphiniums and hollyhocks are respectively pa = 84 and p, = $5 and if Maude has $120 to spend, draw her budget line in blue ink. Draw the highest indifference curve that she can attain in red ink, and label the point that she chooses as A. Delphiniums 40 30 20 10 10 20 30 40 Hollyhocks (c) Now let the price of hollyhocks fall to $3 a unit, while the price of delphiniums does not change. Draw her new budget line in black ink. Draw the highest indifference curve that she can now reach with red ink. Label the point she chooses now as B.
8.4 (0) Maude spends all of her income on delphiniums and hollyhocks. She thinks that delphiniums and hollyhocks are perfect substitutes; one delphinium is just as good as one hollyhock. Delphiniums cost $4 a unit and hollyhocks cost 85 a unit. (a) If the price of delphiniums decreases to 83 a unit, will Maude buy more of them? What part of the change in consumption is due to the income effect and what part is due to the substitution effect? (b) If the prices of delphiniums and hollyhocks are respectively pa = 84 and p, = $5 and if Maude has $120 to spend, draw her budget line in blue ink. Draw the highest indifference curve that she can attain in red ink, and label the point that she chooses as A. Delphiniums 40 30 20 10 10 20 30 40 Hollyhocks (c) Now let the price of hollyhocks fall to $3 a unit, while the price of delphiniums does not change. Draw her new budget line in black ink. Draw the highest indifference curve that she can now reach with red ink. Label the point she chooses now as B.
Economics: Private and Public Choice (MindTap Course List)
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Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter20: Consumer Choice And Elasticity
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Transcribed Image Text:8.4 (0) Maude spends all of her income on delphiniums and hollyhocks.
She thinks that delphiniums and hollyhocks are perfect substitutes; one
delphinium is just as good as one hollyhock. Delphiniums cost $4 a unit
and hollyhocks cost $5 a unit.
(a) If the price of delphiniums decreases to $3 a unit, will Maude buy
more of them?
due to the income effect and what part is due to the substitution effect?
What part of the change in consumption is
(b) If the prices of delphiniums and hollyhocks are respectively Pa = 84
and P, = $5 and if Maude has $120 to spend, draw her budget line in
blue ink. Draw the highest indifference curve that she can attain in red
ink, and label the point that she chooses as A.
Delphiniums
40
30
20
10
30
Hollyhocks
10
20
40
(c) Now let the price of hollyhocks fall to 83 a unit, while the price of
delphiniums does not change. Draw her new budget line in black ink.
Draw the highest indifference curve that she can now reach with red ink.
Label the point she chooses now as B.
(d) How much would Maude's income have to be after the price of holly-
hocks fell, so that she could just exactly afford her old commodity bundle
A?,
(e) When the price of hollyhocks fell to $3, what part of the change in
Maude's demand was due to the income effect and what part was due to
the substitution effect?.
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