Quiz 9. Demand Effects2 Ans

Quiz 9. Demand Effects2 Ans - point as C Also draw the new...

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Shomu Banerjee ECON 201 Ysidro’s typical indifference curve is drawn below. Note that it is piecewise linear with kinks that lie along the two rays from the origin. (a) Ysidro’s income is $204, the price of x is $17, and the price of y is $12. Draw his old budget constraint and label the utility maximizing point as A . See the blue line. (b) Ysidro’s income remains at $204, the price of y is still $12, but the price of x falls to $8.50. Draw his new budget constraint and label the utility maximizing
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Unformatted text preview: point as C . Also draw the new indifference curve that passes through C . See the red line. (c) Break up the price effect into substitution and income effects graphically. See the graph. (d) How much more x does Ysidro buy as a result of his substitution effect? 5 units (the movement from A to B ). (e) How much more or less of x does Ysidro buy as a result of his income effect? 4 units more (the movement from B to C ). 25 20 15 10 20 30 25 15 10 5 x y A C B...
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