This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
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....
View
Full Document
 Spring '08
 TOOSSI
 Madame, Madame X, original indifference curve, Madame X.

Click to edit the document details