ECON 110 Fall 2007 Problem Set 4 Solutions

ECON 110 Fall 2007 Problem Set 4 Solutions - Economics 110...

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Economics 110 Problem Set 4 Prof. Rosenblat
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Economics 110 Problem Set 4 Prof. Rosenblat 4. (1) Fall in income causes Mexicans to buy fewer tortillas and fewer other goods. First of all, we can immediately say that Mexicans are worse off and move to a lower indifference curve. Moreover, we know that Mexicans spend a larger fraction of their income on tortillas. Therefore income effect is positive and we can conclude that tortillas are inferior. We don’t know whether they are inferior or super-inferior, i.e., Giffen.
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Unformatted text preview: (2) Rise in tortilla prices relative to other goods causes Mexicans to substitute away from totillas. Since tortillas are inferior, income effect is positive, but overall consumption of tortillas is still lower than before the price hike. Therefore tortillas are not Giffen. (3) This statement is therefore inconsistent with results in (2) – it describes a Giffen good in which a positive income effect dominates....
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  • Fall '08
  • giffen, tortillas, Prof. Rosenblat

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