Exercises PT2 - Exer ci ses PT 2 [ Pl ease do not di st r i...

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Exer ci ses PT 2 [ Pl ease do not di st r i but e]
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Ch 8: Sl ut sky Equat i on For t hi s chapt er , you shoul d be abl e t o do t he f ol l owi ng: Fi nd Sl ut sky i ncome ef f ect and subst i t ut i on ef f ect of a speci f i c pr i ce change i f you know t he demand f unct i on f or a good. Show t he Sl ut sky i ncome and subst i t ut i on ef f ect s of a pr i ce change on an i ndi f f er ence cur ve di agr am. Show t he Hi cks i ncome and subst i t ut i on ef f ect s of a pr i ce change on an i ndi f f er ence cur ve di agr am. Fi nd t he Sl ut sky i ncome and subst i t ut i on ef f ect s f or speci al ut i l i t y f unct i ons such as per f ect subst i t ut es, per f ect compl ement s, and Cobb- Dougl as. Use an i ndi f f er ence- cur ve di agr am t o show how t he case of a Gi f f en good m i ght ar i se. Show t hat t he subst i t ut i on ef f ect of a pr i ce i ncr ease unambi guousl y decr eases demand f or t he good whose pr i ce r ose. Appl y i ncome and subst i t ut i on ef f ect s t o dr aw some i nf er ences about behavi or .
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8. 1 As we know, Char l i e consumes appl es and bananas. Recal l t hag t hi s ut i l i t y f unct i on i s U ( x A , x B ) = x A x B . The pr i ce of appl es i s $1, t he pr i ce of bananas i s $2, and Char l i e’ s i ncome i s $40 a day. Now assume t hat t he pr i ce of bananas suddenl y f al l s t o $1. ( a) How many appl es and bananas di d Char l i e consume a day bef or e t he pr i ce change? On a gr aph bel ow, use bl ack i nk t o dr aw Char l i e’ s or i gi nal budget l i ne and put t he l abel A on hi s chosen consumpt i on bundl e. ( b) I f , af t er t he pr i ce change, Char l i e’ s i ncome had changed so t hat he coul d exact l y af f or d hi s ol d consumpt i on bundl e, what woul d hi s new i ncome be? W i t h t hi s i ncome and t he new pr i ces, how many appl es and bananas di d Char l i e consume a day? Use r ed i nk t o dr aw t he budget l i ne cor r espondi ng t o t hi s i ncome and t hese pr i ces. Label t he bundl e t hat Char l i e woul d choose at t hi s i ncome and t he new pr i ces wi t h t he l et t er B .
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( c) Does t he subst i t ut i on ef f ect of t he f al l i n t he pr i ce of bananas make hi m buy mor e bananas or f ewer bananas? How many mor e or f ewer ? ( d) How many appl es and bananas does Char l i e buy act ual l y buy af t er t he pr i ce change? Use bl ue i nk t o dr aw Char l i e’ s act ual budget l i ne af t er t he pr i ce change. Put t he l abel C on t he bundl e t hat he act ual l y chooses af t er t he pr i ce change. Dr aw 3 hor i zont al l i nes on your gr aph, one f r om A t o t he ver t i cal axi s, one f r om B t o t he ver t i cal axi s, and one f r om C t o t he ver t i cal axi s. Al ong t he ver t i cal axi s, l abel t he i ncome ef f ect , t he subst i t ut i on ef f ect , and t he t ot al ef f ect on t he demand f or bananas. I s t he bl ue l i ne par al l el t o
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( e) The i ncome ef f ect of t he
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This note was uploaded on 03/14/2010 for the course ECON microecono taught by Professor Yy during the Spring '10 term at Seoul National.

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Exercises PT2 - Exer ci ses PT 2 [ Pl ease do not di st r i...

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