HW2_s08 - b(3 points Is the income effect or the...

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HW #1 Economics 304K: Introduction to Microeconomics Prof. Meg Ledyard Due 2/19/08 (25 Points total) Remember to type the homework except for charts and graphs. In order to get full credit, you must show all of your work. Homework is due in class on the date listed above. If you do not staple your homework, please include your name on all pages, and the number of pages on the first page. Please include your EID on your Homework, particularly if you use a nickname. Question 1(13 points) Suppose that Ryan only consumes hair gel and mouthwash. Assume that they are complements. Suppose that Ryan has 300 to spend on both products. The price of hair gel is 15. Suppose that price of mouthwash falls from 10 to 50. a. (10 points) In a clearly labeled diagram, show the effects of this price change on Ryan’s consumption of hair gel and mouthwash.
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Unformatted text preview: b. (3 points) Is the income effect or the substitution effect bigger for hair gel for Ryan? How do you know? Question 2 (12 points) Consider the perfectly competitive market for apple sauce in Austin. For each of the following statements, show what happens to market price and quantity on a well labeled graph. State in words what happens, and explain why (why did you change your graph the way that you did?) (Each part is independent from the others.) a. (3 points) A news report shows that apple sauce decreases cancer risk. b. (3 points) The price of apples decreases and people (consumers) move out of Austin. c. (3 points) The price of pork (a compliment for apple sauce) decreases and there is a decrease in the cost of jars (to hold the apple sauce.) d. (3 points) The cost of sugar increases....
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