PAM200_Section4_Solutions

PAM200_Section4_Solutions - PAM200 Section 4 Problem 5.4 If...

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Problem 5.4 If demand for good X is perfectly price inelastic then the demand curve is a vertical line and quantity remains constant as price changes. Graphing the price consumption curve for good X on an optimal choice diagram would appear as Price consumption curve X Y The price consumption curve is a straight line because the level of consumption of of X is constant. Problem 5.7 a) Denoting the level of income by I , the budget constraint implies that I y p x p y x = + and the tangency condition is y x p p x = 2 1 , which means that 2 2 4 x y p p x = . The demand for x does not depend on the level of income. b) From the budget constraint, the demand curve for y is, x y y y x p p p I p x p I y 4 - = - = . You can see that the demand for y increases with an increase in the level of income, indicating that y is a normal good. Moreover, when the price of x goes up, the demand for y increases as well. Problem 5.14
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This homework help was uploaded on 02/19/2009 for the course PAM 2000 taught by Professor Evans,t. during the Fall '07 term at Cornell.

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PAM200_Section4_Solutions - PAM200 Section 4 Problem 5.4 If...

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