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(A) Suppose an individual who derives utility u(x, y) from consuming a units of the good X and y units of the good Y. Prices of goods X and Y are respectively Pr = 1 and Py = p. Furthermore, the individual has a budget m. What is the demand for Y if the utility function is: u(x, y) = min{x, ay}. (a) y(p, m) = am (b) y(p, m) = (c) y(p, m): = (d) y(p, m) = = am a+p m a+p m 1+p

(A) Suppose an individual who derives utility u(x, y) from consuming a units of the good X and y units of the good Y. Prices of goods X and Y are respectively Pr = 1 and Py = p. Furthermore, the individual has a budget m. What is the demand for Y if the utility function is: u(x, y) = min{x, ay}. (a) y(p, m) = am (b) y(p, m) = (c) y(p, m): = (d) y(p, m) = = am a+p m a+p m 1+p

Microeconomics A Contemporary Intro
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 8QFR
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(A) Suppose an individual who derives utility u(x, y) from consuming a units of the good X and y units of the good Y. Prices of goods X and Y are respectively p = 1 and Py = p. Furthermore, the individual has a budget m. What is the demand for Y if the utility function is: u(x, y) = min{x, ay}. (a) y(p, m) = am (b) y(p, m) = = (c) y(p, m)= (d) y(p, m) = = am a+p m a+p m 1+p (B) Same setup as (A) with u(x, y) = ax + y and ap<1. What is the demand for X? (a) x(p, m) = m (b) x(p, m) = 0 (c) x(p, m) = m (d) x(p, m) = am (C) Suppose a normal good X. Its price increases from pa to p > Pr. The quantity demanded of good X is q. Which of the following is true ? (a) The substitution effect increases q but the income effect decreases q and over- come the substitution effect. Overall q decreases. (b) The substitution effect decreases q but the income effect increases q come the substitution effect. Overall q increases. and over- (c) Both the income and substitution effects increase q. Overall q increases. (d) Both the income and substitution effects decrease q. Overall q decreases. (D) Suppose an inferior good X (not Giffen). Its price increases from pr to pr> Pr. The quantity demanded of good X is q. Which of the following is true ? (a) The income effect increases q but the substitution effect decreases q and over- come the income effect. Overall q decreases. (b) Both the income and substitution effects decrease q. Overall q decreases. (c) The substitution effect decreases q but the income effect increases and over- come the substitution effect. Overall q increases. (d) Both the income and substitution effects increase q. Overall q increases.
Transcribed Image Text:(A) Suppose an individual who derives utility u(x, y) from consuming a units of the good X and y units of the good Y. Prices of goods X and Y are respectively p = 1 and Py = p. Furthermore, the individual has a budget m. What is the demand for Y if the utility function is: u(x, y) = min{x, ay}. (a) y(p, m) = am (b) y(p, m) = = (c) y(p, m)= (d) y(p, m) = = am a+p m a+p m 1+p (B) Same setup as (A) with u(x, y) = ax + y and ap<1. What is the demand for X? (a) x(p, m) = m (b) x(p, m) = 0 (c) x(p, m) = m (d) x(p, m) = am (C) Suppose a normal good X. Its price increases from pa to p > Pr. The quantity demanded of good X is q. Which of the following is true ? (a) The substitution effect increases q but the income effect decreases q and over- come the substitution effect. Overall q decreases. (b) The substitution effect decreases q but the income effect increases q come the substitution effect. Overall q increases. and over- (c) Both the income and substitution effects increase q. Overall q increases. (d) Both the income and substitution effects decrease q. Overall q decreases. (D) Suppose an inferior good X (not Giffen). Its price increases from pr to pr> Pr. The quantity demanded of good X is q. Which of the following is true ? (a) The income effect increases q but the substitution effect decreases q and over- come the income effect. Overall q decreases. (b) Both the income and substitution effects decrease q. Overall q decreases. (c) The substitution effect decreases q but the income effect increases and over- come the substitution effect. Overall q increases. (d) Both the income and substitution effects increase q. Overall q increases.
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