ECNS 201 PRINTOUT
8th Edition
ISBN: 9781337096553
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 21, Problem 6QR
To determine
The budget constraint of the consumer.
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Students have asked these similar questions
Jerry spends his entire budget on bread and gasoline. His preferences are complete, transitive,
monotonic, and convex. For Jerry, bread is an inferior good that follows the law of demand.
Moreover, his cross-price elasticity of demand for gasoline with respect to the price of bread is
negative. Suppose the price of bread increases, all else constant.
a. Create a chart to show the total, income, and substitution effects on bread and gasoline of the
increase in the price of bread.
b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to
label each effect on your graph (or through the chart from part a) and plot bread on the x-axis
and gasoline on the y-axis
Please answer fast
Problem 2
Marty purchases two goods, food and clothing. He has a diminishing marginal rate of
substitution of food for clothing. Let x indicate the amount of food consumed and y the
amount of clothing. Suppose the price of food increases from P, to P2. On a clearly labeled
graph, illustrate the income and substitution effects for each of the following scenarios:
a) Food is a normal good.
b) The income elasticity of food is zero (i.e. Marty's consumption of food does not change
in response to his income).
c) Food is an inferior good, but not a Giffen good.
This question is based on problem 5.9 from Besanko and Breautigam. You can (but don't have
to) assume that Marty's consumer choice problem has an interior solution both before and after
the price change.
Chapter 21 Solutions
ECNS 201 PRINTOUT
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1CQQCh. 21 - Prob. 2CQQCh. 21 - Prob. 3CQQCh. 21 - Prob. 4CQQCh. 21 - Prob. 5CQQCh. 21 - Prob. 6CQQ
Ch. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QRCh. 21 - Prob. 7QRCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PA
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Similar questions
- I understand the substitution effect, but I really need to understand the Income effect. Please explain that and thank you in advanced ?arrow_forward(c) When the price of CCC increases from $1 to $8, calculate Maya’s substitution effect and income effect. (d) According to your calculation in part (c), is CCC a normal good or an inferior good? Explain. Is CCC an ordinary good or a Giffen good? Explain.arrow_forwardCompare the following two pairs of goods and answer the following questions about complements, substitutes and the income and substitution effects: (1) Coke and Pepsi(2) Shoes and socks In which case will a consumer respond more to a change in the relative price of the two goods?arrow_forward
- Lou’s preferences over pizza (x) and other goods (y) are given by U(x, y) = 2xy2. His income is $200. a) Calculate his optimal basket when Px =4 and Py = 1. b) Calculate his income and substitution effects of a decrease in the price of food to $2. c) Calculate the compensating variation of the price change. d) Calculate the equivalent variation of the price change.arrow_forwardCarlos is originally consuming his optimal consumption bundle of cell phones and gasoline when the price of gasoline falls. Assume that both gasoline and cell phones are normal goods. How will a decrease in the price of gasoline affect your consumption of cell phones and gasoline? Explain using the substitution and income effects.arrow_forwardThe price of pillows rises from $35 to $40 per pillow, while the price of sodas is unchanged. For a consumer with constant income of $15,000, show what happens to consumption of both goods (assume both goods are normal goods). Decompose the change into income and substitution effectsarrow_forward
- Julie buys food and other goods. She has an income of $400 per month. The price of food is initially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change. To help Julie out, her mother offers to send her a check each month to supplement her income. Julie tells her mother, “Thanks, Mom. If you would send me a check for $50 per month, I would be exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and not receiving the $50 from you.” Which of the following statements is true? Explain. The increased price of food has:a) an income effect of +$50 per monthb) an income effect of -$50 per month c) a compensating variation of +$50 per monthd) a compensating variation of -$50 per monthe) an equivalent variation of +$50 per monthf ) an equivalent variation of -$50 per montharrow_forwardAlong an individual demand curve for food, which one of the following is not held constant? a.The consumer's income b.The consumer's level of utility c.The price of all other goods d.The consumer's utility functionarrow_forwardThe effect of a decrease in the price of food, as depicted in the figure, leads us to believe that: A) food is a Giffen good and clothing an inferior good. B) food is a Giffen good and clothing a normal good. C) food is a normal good and clothing a Giffen good. D) food is an inferior good and clothing a Giffen good.arrow_forward
- Consider the increase in the price of a can of soda and assume that soda is a normal good. Describe how the income and substitution effects impact on the demand for the cola if its price increases. Also describe how these two effects interact for inferior goods if there is a fall in the price of the good. Use bullet pointsarrow_forwardLou's preferences over pizza (X) and other goods (y) are given by U(X,Y)=XY^2 with associated marginal utilities. His income is $240 @) calculate his optimal basket when Px=8 and Py=1 b)calculate his income and substitution effects of a decrease in the price of food to $6 c) Calculate the compensating variation of the price change. d) calculate the equivalent variation of the price change.arrow_forwardDraw a budget constraint and indifference curve for Pepsi and Pizza on the same graph. Show the optimum point and explain what it represents. Show what happens to the budget constraint and the optimum when price of pizza rises? Decompose the change in part 2 into income and substitution effect. Derive the demand curve from this price change.arrow_forward
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