HW6S_3020 - Econ 302 Solution to sixth Problem Set Spring...

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Unformatted text preview: Econ 302- Solution to sixth Problem Set Spring 2010-Ali Toossi Due: Wednesday, March 10 Answer to question 3. The Engel curve for normal good is positively sloped (Tenderloin is a normal good). The Engel curve for inferior good is negatively sloped (Hamburger is an inferior good). Answer to question 4. Some examples: hamburger, generic beer, bus tickets, almost anything purchased at stores selling "as is" damaged or discontinued merchandise. Answer to question 5. Yes. A downward-sloping PCC simply implies that as the price of a good falls, the consumer purchases so much more of the good that the proportion of income spent on the good actually increases. Answer to question 13. False. In the diagram below, an increase in the price of X leads to a reduction in the amount of X consumed, but an increase in the quantity of Y. 1 Positive income effect for both X and Y because the quantity of both X and Y increase when income is increased . Chang e in Y Change in X Y X Answer to question 16. No. If bread is an inferior good, then as income increases, quantity demanded of bread decreases. If butter were an inferior good also, then likewise, quantity demanded of butter would decline as income grows. However, spending on both goods cannot decline, because there would be no way of spending the added income. Thus, not all goods can be inferior. Answer to problem 1. Let’s denote: Orange juice (O), Apple juice (A). Sam’s budget constraint is 2O + A = 6 or O = 3 – (1/2)A. Sam’s utility function is U (O, A) = 3O + A. Sam’s indifference curves are straight lines with constant MRS = 1/3. Sam’s optimal bundle is to consume no apple juice and three cups of orange juice. When the price of apple juice doubles, Sam would not need any additional income to afford his original consumption bundle, since he does not consume any apple juice. Orange Juice in Cups 3 Bs’ = B 1 B ICs 3 6 9 Apple Juice in cups/week Answer to problem 2....
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HW6S_3020 - Econ 302 Solution to sixth Problem Set Spring...

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