Econ100A_REVIEW08

Econ100A_REVIEW08 - REVIEW QUESTIONS 1. Good 1 is normal,...

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REVIEW QUESTIONS 1. Good 1 is normal, good 2 is normal and the two goods are substitutes (but not perfect substitutes). Using budget lines and 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. My utility function is U(x 1, x 2 ) = x 1 3 x 2 + 8 and my utility-maximizing bundle (at existing prices and my income) consists of 3 units of x 1 and 2 units of x 2 . If p 1 = 10, what must p 2 equal? 3. A consumer has preferences over leisure, Le, and disposable income, I. Use budget lines and indifference curves to illustrate the case where a simultaneous halvng of the wage rate and a doubling of non-wage income would have no effect on her optimal choice of disposable income . 4. a. Using indifference curves and budget lines in the (c 1 , c 2 ) plane, illustrate a situation in which an increase in the interest rate, r, causes someone who was originally saving to save less . b. Does the substitution effect cause the person to save more or less? Explain why. (Just use logic—
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This note was uploaded on 04/10/2008 for the course ECON 100A taught by Professor Babcock during the Spring '07 term at UCSB.

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