Quiz 8. Demand Effects

# Quiz 8. Demand Effects - 10 20 2 Joan's monthly income is...

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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 Joan’s initial budget constraint and show where on this budget constraint she will maximize her utility. (b) Now p x falls to \$5/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 Pie 10 20 10 20...
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## This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

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

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