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Unformatted text preview: Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Solutions to Problem Set 4 1. a. b. Oranges O A A O B B A A A B Apples Slope = – 5 Slope = – 2 c. Given the prices in part c., Jane will move from point A to point B and thus it will substitute apples for oranges. d. The MRS at point B is 2 (equal to the absolute value of the slope of the isocost tangent to the indifference curve at point B). e. The absolute value of the slope of the isocost line tangent to the indifference curve at point A is 5 (equal to the MRS). Since the slope of an isocost line is the relative price of apples, the price of apples must be $5 if the price of oranges is $1. 2 2. Y a. Y b. Y c. A A B B A B X X X a. If X is an inferior good, then the individual will consume a larger quantity of X when her income falls. b. If the prices of both X and Y increase in the same proportion, then the isocost line shifts down but its slope doesn’t change. If we assume that both X and Y are normal goods, then the individual will consume a smaller quantity of both X and Y. c. If the price of X falls, the individual will consume a larger quantity of X (unless X is a Giffen good). If the demand for X is inelastic, then the total expenditure on good X will decrease as X increases. That means that the total on good X will decrease as X increases....
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- Fall '09
- Economics, ICC