Consider an endowment setting where (@1, 2) = (1, 1). Assume that x₁, x₂ are ordinary goods. x₁ is an inferior good and x2 is a normal good. Draw a diagram of Slutsky decomposition of a price decrease. The rotation/shifts of the budget line • The optimal bundle before the price change (A) • The optimal bundle after accounting for only the substitution effect (B) • The optimal bundle after accounting for also the ordinary income effect (C), • The optimal bundle after accounting for the endowment income effect (D)

Consider an endowment setting where (@1, 2) = (1, 1). Assume that x₁, x₂ are ordinary goods. x₁ is an inferior good and x2 is a normal good. Draw a diagram of Slutsky decomposition of a price decrease. The rotation/shifts of the budget line • The optimal bundle before the price change (A) • The optimal bundle after accounting for only the substitution effect (B) • The optimal bundle after accounting for also the ordinary income effect (C), • The optimal bundle after accounting for the endowment income effect (D)

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter6: Demand Relationships Among Goods

Section: Chapter Questions

Problem 6.8P

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Q1-Select the true or false for the following statement also give the explanation and support your answer with graphical presentation where necessary. Explanation is compulsory 3 to 6 line. Two indifference curves can intersect each other. If total utility at optimum level marginal utility is negative. If government imposes price ceiling on goods “X” the result is excess supply and shortage of demand for goods “X”. Consumer budget line cannot touch axis. In perfectly inelastic goods and services change in price equal to change in quantity demand.
Suppose Coke and Pepsi are perfect substitutes for me, and right and left shoes are perfect complements. A. Suppose my income allocated to Coke/Pepsi consumption is $100 per month, and my income allocated to right/left shoe consumption is similarly $100 per month. a. Suppose Coke currently costs $0.50 per can and Pepsi costs $0.75 per can. Then the price of Coke goes up to $1 per can. Illustrate my original and my new optimal bundle with "Coke" on the horizontal and "Pepsi" on the vertical axis. b. Suppose right and left shoes are sold separately. If right and left shoes are originally both priced at $1, illustrate (on a graph with "right shoes" on the horizontal and "left shoes" on the vertical) my original and my new optimal bundle when the price of left shoes increases to $2. c. True or False: Perfect complements represent a unique special case of homothetic tastes in the following sense: Whether income goes up or whether the price of one of the goods falls, the optimal bundle…
Q.3 Explain the following utility functions graphically and mathematically: 1. Perfect substitutes utility function 2. Perfect complements utility function 3. Cobb-Douglas utility function.
Lea's utility function is U =0.7 ln( x ) + y where x denotes her consumption of good X and y denotes her consumption of good Y. Suppose the government imposes a per-unit tax on good X equal to 5 dollars. The price of good X charged by the sellers of good X is Px = 9 (and does not change due to the tax), the price of good Y is Py = 13 and Lea's income is M = 389. What is Lea's own-price substitution effect of the price increase due to the tax ?
Katalin has the utility of U(x 1, x 2 ) = max{3x 1, 4x 2 } of purchasing products 1 and 2. Katalin has an initial endowment of ( ω 1,ω 2 ) = (40,40), and initial prices are 2 and 5 forproducts 1 and 2, respectively. When prices change and 3$ for both products, find the pure substitution, income, and endowment effects for Katalin.
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