ARE100A INTERMEDIATE MICROECONOMICS: THEORY OF PRODUCTION AND CONSUMPTION FALL QUARTER 2009 Problem Set 4 Answer guide Due Thursday, October 15 at the start of class. 1. Price of food and other stuff rises but “money income” remains constant. Quantity demanded of food—up, down, or no change? Down. Income effect. Food is normal, budget constraint shifts in from both axes in a (maybe) parallel fashion. 2. Price of food rises relative to the other price with “real income” is constant. Quantity demanded of food—up, down or no change? Down, substitution effect only slide around a fixed indifference curve. 3. Demand curve for peaches more or less elastic than the demand elasticity of all fruit? More elastic. Nectarines and other such fruits substitute for peaches, but there are fewer and more distant substitutes for fruit as a group. If peaches price alone rises peaches would lose a high % of previous sales. 4. Rice and beer, only; 20% of income on rice; income elasticity for beer = 1.2.
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