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Unformatted text preview: b. Determine if product B is a normal, inferior, or Giffen good. Explain. Solution: a. The total effect of the price change is the difference in the quantities before and after the price change, or 15 - 7 = 8. This change of 8 includes the income and substitution effects. The reduction in consumption that resulted from the reduction in income to put Madame X back on the original indifference curve represents the income effect. This difference is 15 - 9 = 6. The difference between 15 - 7 = 8 and 15 - 9 = 6 is the substitution effect, i.e. 8 - 6 = 2. b. Since the two effects are additive and both are positive, we have a normal good, i.e., 6 + 2 = 8....
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This note was uploaded on 04/07/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.
- Spring '08