Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 7, Problem 4RQ
To determine
Income and substitution effect.
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A consumer’s budget set for two goods (X and Y) is 600 ≥ 3X + 6Y. (LO2)
a. Illustrate the budget set in a diagram.
b. Does the budget set change if the prices of both goods double and the consumer’s
income also doubles? Explain.
c. Given the equation for the budget set, can you determine the prices of the two
goods? The consumer’s income? Explain.
A consumer has $300 to spend on goods X and Y. The market prices of these two goodsare Px = $15 and Py = $5. (LO2)a. What is the market rate of substitution between goods X and Y?
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Assume Brian"s income elasticity of demand for milk is 1, and he spends 1% of his income on milk. If his price elasticity of demand for milk is –0.03, what is his substitution price elasticity?
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Assume Brian"s income elasticity of demand for milk is 1, and he spends 1% of his income on milk. If his price elasticity of demand for milk is –0.03, what is his substitution price elasticity?
Chapter 7 Solutions
Economics (Irwin Economics)
Ch. 7.1 - Prob. 1QQCh. 7.1 - Prob. 2QQCh. 7.1 - Prob. 3QQCh. 7.1 - Prob. 4QQCh. 7.A - Prob. 1ADQCh. 7.A - Prob. 2ADQCh. 7.A - Prob. 3ADQCh. 7.A - Prob. 1ARQCh. 7.A - Prob. 2ARQCh. 7.A - Prob. 1AP
Ch. 7.A - Prob. 2APCh. 7.A - Prob. 3APCh. 7 - Prob. 1DQCh. 7 - Prob. 2DQCh. 7 - Prob. 3DQCh. 7 - Prob. 4DQCh. 7 - Prob. 5DQCh. 7 - Prob. 6DQCh. 7 - Prob. 7DQCh. 7 - Prob. 8DQCh. 7 - Prob. 9DQCh. 7 - Prob. 10DQCh. 7 - Prob. 1RQCh. 7 - Prob. 2RQCh. 7 - Prob. 3RQCh. 7 - Prob. 4RQCh. 7 - Prob. 5RQCh. 7 - Prob. 1PCh. 7 - Prob. 2PCh. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6PCh. 7 - Prob. 7P
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- For Jones, X and Y are perfect substitutes, and he is always willing to substitute 6 units of X for 2 units of Y. The price per unit of X is $5, and the price per unit of Y is $15. Jones’s income is $60. Compute the slope of Jones’s budget line and how many units of X does Jones consume? Suppose that the price of X increases to $10, and everything else remains the same. How many units of X does Jones consume? At which price does the demand curve of X become horizontally flat?arrow_forwardI. For the normal good, make a (Hypothetical) linear demand schedule with 7 different price points and corresponding quantity demanded for your own household. For the same normal good, make another (Hypothetical) linear demand schedule with 7 different price points and corresponding quantity demanded for your neighbor. Assuming that you and your neighbor are the only two households in the market, make a market demand schedule for the same normal good. Draw and interpret a graph to show the market demand and impact of changes in quantity demanded, if price of the same normal good decreases.arrow_forwardConsider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)? How much units will increase for both x₁ and x₂?arrow_forward
- Assume that both the demand curve and the supply curve for coffee shift to the right but the demand curve shifts more than the supply curve. As a result O the equilibrium price of coffee will decrease; the equilibrium quantity may increase or decrease. O the equilibrium price of coffee may increase or decrease; the equilibrium quantity will increase. O both the equilibrium price and quantity of coffee will increase. O the equilibrium price of coffee will increase; the equilibrium quantity may increase or decrease.arrow_forward14)Why does quantity supplied go up as price goes up? * a)For a given time period, the marginal utility gained by consuming equal successive units of a good will decline as the amount consumed increases b)Because as price rises, producer profit rises, which induces producers to supply a larger quantitiy. c)Because people substitute lower-priced goods for higher-priced goods as price rises. d)Both (a) and (b) abovearrow_forward14 : Assume that a consumer has a given budget or income of $10 and that she can buy only two goods, apples or bananas. The price of an apple is $2.00 and the price of a banana is $1.00. If the consumer decides to buy 4 apples, how many bananas can she also buy with the remainder of her budget, assuming she exhausts her income?arrow_forward
- Assume a piece of jewelry, and 3 consecutive drops in its price, from ??1 to ??2, from ??2 to ??3 and from ??3 to ??4. Alia’s preferences are such that her demand is relatively elastic between ??1 and ??2, relatively inelastic between ??2 and ??3, and that she perceives that piece of jewelry as a Giffen good between prices ??3 and ??4. How would her priceconsumption curve look like in an indifference curves framework with well-behaved preferences? Clearly label your graph.arrow_forwardWhat is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizingarrow_forward- Create a consumer model that shows how economists explain the consumer choice between two products (X & Y) that maximize the consumer’s utility. Do not use numbers. Just graphs and detailed explanations. Show why the equilibrium point (tangency) shows the best bundle of X & Y and that any other point will not reflect a bundle that maximizes consumers' utility. Explain the income and substitution effect. Derive the demand function from the consumer theory. Do not use numbers. Just graphs and detailed explanationsarrow_forward
- Assume that supply for cars increases for any given price and, at the same time, the demand for cars reduces for any given price. You can predict: a. That the price of cars will unambiguously increase, while the car sales may increase or decrease. b. That car sales will unambiguously decrease, while the car price may increase or decrease. c. That the price of cars will unambiguously decrease, while the car sales may increase or decrease. d. That car sales will unambiguously increase, while the car price may increase or decrease.arrow_forward2 - Suppose that Omer's income is OR 4800. His demand for books ( good X ) and shoos ( good Y ) depends upon the prices for these two goods , if the price of one unit of book ( good X ) is OR 40 and the price of one unit of shoos ( good Y ) is OR 20 . a ) Draw the budget line for Omar ( show your work ) b ) Find the slope of this budget line .arrow_forwardADVANCED ANALYSIS Assume that demand for a commodity is represented by the equation P=90−2Qd.P=90−2Qd.Supply is represented by the equation P=−5+3Qs,P=−5+3Qs,where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price.Instructions: Round your answer for price to 2 decimal places and enter your answer for quantity as a whole number. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price and equilibrium quantity. Equilibrium price = $ Equilibrium quantity = unitsarrow_forward
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