ch4_p2 - her back on the original indifference curve she...

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4_2. The following data pertain to products A and B, both of which are purchased by Madame X. Initially, the prices of the products and quantities consumed are: , $10 P A = , 3 Q A = , $10 P B = 7. Q B = Madame X has $100 to spend per time period. After a reduction in price of B, the prices and quantities consumed are: , $10 P A = , 2.5 Q A = , $5 P B = . 15 Q B = Assume that Madame X maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Madame X to put
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Unformatted text preview: her back on the original indifference curve, she would consume this combination of A and B: , 1.5 Q A = . 9 Q B = a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect. b. Determine if product B is a normal, inferior, or Giffen good. Explain....
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