Tutorial assignment 3
Due at the beginning of your
week 4 tutorial
1. Suppose we live in a world where there are just two goods to consume. Can both of
them be:
a.
Normal?
b.
Income inferior?
c.
Ordinary?
d.
Giffen?
2. Nancy spends all her income on good 1 and good 2. As p
1
increases while p
2
remains fixed, Nancy’s priceoffer path is horizontal.
a.
How does Nancy’s expenditure
on good 1 respond to changes in p
1
? (
Hint:
write her budget constraint.)
b.
Is good 2 a complement or a substitute for good 1?
3. Suppose that two goods are perfect complements. If the price of good 1 changes
what part of the change in demand is due to the substitution effect and what is due
to income effect?
4.
Alex needs some caffeine to function well (and the more the better). Suppose that a
cup of coffee contains twice as much caffeine as a cup of tea, so that Alex can
perfectly substitute one cup of coffee for two cups of tea, and his utility function is of
the form
U(C, T)=2C+T
where
C
denotes cups of coffee, and
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 06/18/2010 for the course ECOS 2001 taught by Professor None during the Three '09 term at University of Sydney.
 Three '09
 NONE

Click to edit the document details