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NicholsonMTAISECh5IM

# NicholsonMTAISECh5IM - CHAPTER 5 INCOME AND SUBSTITUTION...

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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 Analytical Problems which stress various elasticity measures and introduce the Almost Ideal Demand System. Comments on Problems 5.1 This problem shows the convenient result that budget shares can be computed from expenditure functions through logarithmic differentiation. 5.2 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. 5.3 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. 5.4 An exploration of the notion of homothetic functions. This problem shows that Giffen's Paradox cannot occur with homothetic functions. 5.5 This is a problem in revealed preference theory. The bundles here violate the strong axiom. 5.6 A fixed-proportions example. Illustrates how the goods used in fixed proportions (peanut butter and jelly) can be treated as a single good looking at utility maximizing choices. 5.7 Another utility maximization example. In this case, utility is not separable and cross-price effects are important. 5.8 An example of perfect substitutes. Solving this is easy with intuition, but students should not try to use calculus because of the “knife-edge” nature of demand with perfect substitutes. Analytical Problems 5.9 Price indifference curves. This problem introduces a graphical concept that is sometimes used to illustrate theoretical points. 5.10 Aggregation of elasticities for many goods. This problem shows how the aggregation relationships introduced in Chapter 5 for two goods can be generalized to any number of goods. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 26

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27 Chapter 5: Income and Substitution Effects 5.11 The almost ideal demand system. This problem introduces a parametrization of the expenditure function that is widely used in empirical studies of demand. The connections between this problem and Problem 5.14 are quite important in the interpretation of many empirical studies. 5.12 More on elasticities. Shows how the elasticity of substitution affects the sizes of price elasticities. 5.13 Quasi-linear utility (revisited). This extends Problem 3.12 to consider the special form of the Slutsky Equation for the Quasi-linear function.
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