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 price-offer 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
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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.