Quiz 8. Demand Effects

Quiz 8. Demand Effects - Pie 10 20 10 20 2. Joan's monthly...

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Shomu Banerjee ECON 201 INCOME, SUBSTITUTION & PRICE EFFECTS PROBLEM 1. Joan's monthly income is $120, p y = $20/bottle, p x is $12/pie. Her preferences for pies and champagne can be represented by the following utility function: u ( x , y ) = x + y . (a) Draw Joan’s initial budget constraint and show where on this budget constraint she will maximize her utility. (b) Now p x falls to $6/pie. Draw Joan’s new budget constraint and show where on this budget constraint she will maximize her utility. (c) Show the price, income and substitution effects. Champagne
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Unformatted text preview: Pie 10 20 10 20 2. Joan's monthly income is $100, p y = $10/bottle, p x is $20/pie. Her preferences for pies and champagne can be represented by the following utility function: u ( x , y ) = x + y . (a) Draw Joans initial budget constraint and show where on this budget constraint she will maximize her utility. (b) Now p x falls to $5/pie. Draw Joans new budget constraint and show where on this budget constraint she will maximize her utility. (c) Show the price, income and substitution effects. Champagne Pie 10 20 10 20...
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Quiz 8. Demand Effects - Pie 10 20 10 20 2. Joan's monthly...

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