Explain the Price Effect Curve below in the case when the price of good 1 upon x-axis rises whereas the price of good 2 on y-axis remains unchanged? If we connect the points, we have the price consumption curve. It shows the utility-maximizing points when the price of a good changes. X, X, X,

Explain the Price Effect Curve below in the case when the price of good 1 upon x-axis rises whereas the price of good 2 on y-axis remains unchanged? If we connect the points, we have the price consumption curve. It shows the utility-maximizing points when the price of a good changes. X, X, X,

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 2CQQ

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Concept explainers

Normal and Inferior Goods

Understanding a normal good and an inferior good is important because it tells us what will happen to demand different products during booms and recessions.

Question

Explain the Price Effect Curve below in the case when the price of good 1 upon x-axis rises
whereas the price of good 2 on y-axis remains unchanged?
If we connect the points, we have the
price consumption curve.
It shows the utility-maximizing
points when the price of a
good changes.
X3 X2
X,

Expert Solution

Step 1

The person can maximize his utility at the point where the indifference cure is tangent with the budget line.

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