Econ100A_PSET3

Econ100A_PSET3 - same direction as each other, or in...

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Problem Set 3 Comparative Statics of Demand 1. Good 1 is a normal good, Good 2 is an inferior good. Using 3 budget lines and 2 indifference curves, illustrate the effect of an increase in p 2 on the consumption of both x 1 and x 2 . Label income and substitution effects for both goods. 2. Holding all else constant, if good 1 is normal and its price p 1 rises, then quantity consumed of good 1, x 1, must fall. True or False, and explain. 3. Holding all else constant, if good 1 is normal and the price of good 2 (p 2 ) rises, then quantity consumed of good 1 (x 1 ) must A) rise, B) fall, C)stay the same, or D) Can’t tell. Choose which is true and explain. 4. My demand functions for goods 1 and 2 are x 1 (p 1 , p 2 , I) and x 2 (p 1 , p 2 , I). If x 1 (2,5,90) = 20 x 2 (2,5,90) = 10 and x 1 (4,10,170) = 15 x 2 (4,10,170) = 11 can you say anything about how I would rank the commodity bundles (20, 10) and (15, 11)? 5. If a consumer only consumes two commodities, x 1 and x 2 , if x 2 is an inferior good, and if p 1 rises, do the resulting income and substitution effects on good 2 work in the
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Unformatted text preview: same direction as each other, or in opposite directions from each other? 6. Draw and label a compensated price change in p L if my utility is given by u(x L , x R ) = min [x L , x R ]. 7. Draw and label the compensated (Hicksian) demand curve for left shoes (good x L ) if my utility is given by u(x L , x R ) = min [x L , x R ]. 8. Goods 1 and 2 are complements. Using 3 budget lines and 2 indifference curves illustrate the effect of a decrease in p 1 (the price of the first good) on the consumption of good x 2 (the second good). Show and label the income and substitution effects. 9. A consumer consumes only 2 goods, x 1 and x 2 . Can both be inferior? If so, use 2 indifference curves and 2 budget lines to show the effects of an increase in I on consumption of good 1 and good 2. If not, draw the same graph, and show how the consumption bundle chosen after the increase in I would have to be in 2 different places....
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