Intermediate Microeconomics: A Modern Approach, Seventh Edition

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ECONOMICS 300 QUIZ 4 Spring 2005 PLEDGE:____________________________ NAME:______________________________ 1. (10) On the graph below, the price of X increases from $1 to $2. Y 100 55 40 25 30 50 60 75 100 X a. What is the equation for the dotted budget constraint? b. How much of the change in consumption is due to a change in real income? c. How much of the change in consumption is due to the change in relative prices? d. Are X and Y substitutes or complements?
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2. (10) Bill has the following utility function for Captain Crunch (C) and Honeynut
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Unformatted text preview: Cheerios (H) cereals. U(C, H) = C + H. Bill currently has an income of $10 and faces prices of P c = 1 and P H = .5. a. When he is maximizing his utility, how many boxes of each type of cereal will Bill purchase? b. Draw Bill’s best indifference curve and his budget constraint on the graph below. Label the axes, intercepts and curves carefully. c. Suppose P H drops to 25 cents per box. What portion of the change in Bill’s consumption was due to the income and substitution effects? Explain carefully....
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