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CHAPTER 5 INCOME AND SUBSTITUTION EFFECTS Problems in this chapter focus on comparative statics analyses of income and own-price 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 Cobb-Douglas case. Comments on Problems 5.1 An example of perfect substitutes. 5.2 A fixed-proportions 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 cross-price 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. 5.9
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This note was uploaded on 11/06/2009 for the course ECON ECON111 taught by Professor Smith during the Spring '09 term at Punjab Engineering College.

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