Problem Set #4 answer - Economics 101 Professor Wissink...

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Economics 101 Professor Wissink Cornell University ANSWERS TO PROBLEM SET 4 1.(a) and (b) (c) 2.(a) False. A Giffen good must be an inferior good, but the reverse is not true, not all inferior goods are Giffen. It depends on the size of the income effect relative to the size of the substitution effect. (b) Because most people can not afford to buy Saabs, even if they prefer Saabs to Toyotas, or they don't think the difference in utility from driving/owning a Saab is worth the difference in price. (c) False. A change in tastes will not change the slope of the budget line - a change in tastes alters the entire indifference curve map. (d) False. This is true only if prices of all commodities are the same. The consumer equates the “bang per buck” across all goods consumed. (e) Look at the“bang per buck” across the goods consumed: The bang/buck is 3 in widgets and is only 2 in zambowies so she is not utility maximizing. She should consume more widgets and fewer zambowies until the bang/buck is equated across the two.
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This note was uploaded on 03/27/2009 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Problem Set #4 answer - Economics 101 Professor Wissink...

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