CHAPTER 5
INCOME AND SUBSTITUTION EFFECTS
Problems in this chapter focus on comparative statics analyses of income and ownprice changes.
Many of the problems are fairly easy so that students can approach the ideas involved in shifting
budget constraints in simplified settings. Theoretical material is confined mainly to the
Extensions where Shephard's Lemma and Roy’s Identity are illustrated for the CobbDouglas
case.
Comments on Problems
5.1
An example of perfect substitutes.
5.2
A fixedproportions example. Illustrates how the goods used in fixed proportions (peanut
butter and jelly) can be treated as a single good in the comparative statics of utility
maximization.
5.3
An exploration of the notion of homothetic functions. This problem shows that Giffen's
Paradox cannot occur with homothetic functions.
5.4
This problem asks students to pursue the analysis of Example 5.1 to obtain compensated
demand functions. The analysis essentially duplicates Examples 5.3 and 5.4.
5.5
Another utility maximization example. In this case, utility is not separable and crossprice
effects are important.
5.6
This is a problem focusing on “share elasticities”. It shows that more customary
elasticities can often be calculated from share elasticities—this is important in empirical
work where share elasticities are often used.
5.7
This is a problem with no substitution effects. It shows how price elasticities are
determined only by income effects which in turn depend on income shares.
5.8
This problem illustrates a few simple cases where elasticities are directly related to
parameters of the utility function.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 Smith
 Supply And Demand, Elasticities, Px, substitution effects

Click to edit the document details