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James consumes burgers and pies. His income is $20, and when burgers and pies both cost $1, James consumes 4 burgers and 16 pies (Draw a point A name it Figure A). But when the price of pies rises to $2, James consumes 12 burgers and 4 pies (show point B in Figure A). a. Why does the budget constraint shift/rotate as it does in response to the increase in the price of pies? Show this shift/rotate in figure A with actual number provided above. b. Draw the diagram (name it Figure B) on a piece of paper. On your diagram, separate the change in the consumption of pies into the substitution effect and the income effect. Which is larger? Are pies a normal or inferior good? How do you know? Are burgers a normal or inferior good? How do you know? c.

James consumes burgers and pies. His income is $20, and when burgers and pies both cost $1, James consumes 4 burgers and 16 pies (Draw a point A name it Figure A). But when the price of pies rises to $2, James consumes 12 burgers and 4 pies (show point B in Figure A). a. Why does the budget constraint shift/rotate as it does in response to the increase in the price of pies? Show this shift/rotate in figure A with actual number provided above. b. Draw the diagram (name it Figure B) on a piece of paper. On your diagram, separate the change in the consumption of pies into the substitution effect and the income effect. Which is larger? Are pies a normal or inferior good? How do you know? Are burgers a normal or inferior good? How do you know? c.

Principles of Microeconomics
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 1PA
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James consumes burgers and pies. His income is $20, and when burgers and pies both cost $1, James consumes 4 burgers and 16 pies (Draw a point A name it Figure A). But when the price of pies rises to $2, James consumes 12 burgers and 4 pies (show point B in Figure A). a. Why does the budget constraint shift/rotate as it does in response to the increase in the price of pies? Show this shift/rotate in figure A with actual number provided above. b. Draw the diagram (name it Figure B) on a piece of paper. On your diagram, separate the change in the consumption of pies into the substitution effect and the income effect. Which is larger? c. Are pies a normal or inferior good? How do you know? Are burgers a normal or inferior good? How do you know?
Transcribed Image Text:James consumes burgers and pies. His income is $20, and when burgers and pies both cost $1, James consumes 4 burgers and 16 pies (Draw a point A name it Figure A). But when the price of pies rises to $2, James consumes 12 burgers and 4 pies (show point B in Figure A). a. Why does the budget constraint shift/rotate as it does in response to the increase in the price of pies? Show this shift/rotate in figure A with actual number provided above. b. Draw the diagram (name it Figure B) on a piece of paper. On your diagram, separate the change in the consumption of pies into the substitution effect and the income effect. Which is larger? c. Are pies a normal or inferior good? How do you know? Are burgers a normal or inferior good? How do you know?
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