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handout-3ans - part corresponds to the substitution effect...

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Handout 3 Answers: Utility Analysis In the graph below for two different goods, Y and Z, there are two of the consumer’s indifference curves, I 1 and I 2 , and two budget constraints, B 1 – the original budget constraint, and B 2 – the budget constraint after the indicated price change. Answer the following questions with respect to this information. a) Indicate the change in the quantity of Y demand per period as a result of the indicated change in the price of Y. As P y ! ’s consumer buys more Y from Y 1 " Y 2 b) Indicate what portion of the change corresponds to the income effect and what
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Unformatted text preview: part corresponds to the substitution effect. Y 1 " Y 2 = Substitution Effect ( # Y) Y 2 " Y 3 = Income Effect ( ! Y) Y 1 " Y 3 = Total Effect ( # Y) c) Is Y an inferior good? ____Yes___ Why? As real income # ’ed consumers purchased less Y. c) Is Z a substitute good? _____Yes__ Why? As P y ! ’ed consumers purchased less Z. Good Z Good Y $ A P Y ! ’s $ B $ C Substitution Effect Income Effect Total Effect Substitution Effect Total Effect Income Effect Z 3 Z 2 Z 1 Y 3 Y 2 Y 1 B 2 B 1 I 2 I 1...
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