This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Cornell University Economics 3130 Problem Set 4 Due 2/20/09 1. (Question 7.2 from Text) Suppose you have an income of $24 and the only two goods you consume are applies ( x 1 ) and peaches ( x 2 ). The price of apples is $4 and the price of peaches is $3. (a) Suppose that your optimal consumption is 4 peaches and 3 apples. i. Illustrate this graphically with a budget constraint and indifference curve. ii. Now suppose that the price of apples falls to $2 and I take enough money away from you to make you as happy as you were originally. Will you buy more or fewer peaches? iii. In reality, I do not actually take income away from you as described in (ii) but your income stays at $24 after the price of applies falls. I observe that, after the price of apples fell, you did not change your consumption of peaches. Can you conclude whether peaches are an inferior or normal good for you? (b) Suppose that your tastes can be described by the function u ( x 1 ,x 2 ) = x 1 x 1- 2 ....
View Full Document