Lesson 10 Assignment 2

Lesson 10 Assignment 2 - Ashley B. Hilliard 258-10-0169...

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Ashley B. Hilliard 258-10-0169 July 5, 2010-October 22, 2010 BA 372 Lesson#10, Assignment 2 1. Mario consumes only cheese and crackers. A. Could cheese and crackers both be inferior goods for Mario? Explain. Cheese and crackers cannot both be inferior goods, because if Mario's income rises he must consume more of something. B. Suppose that cheese is a normal good for Mario while crackers are an inferior good. If the price of cheese falls, what happens to Mario’s consumption of crackers? What happens to his consumption of cheese? Explain. If the price of cheese falls, the substitution effect means Mario will consume more cheese and fewer crackers. The income effect means Mario will consume more cheese because cheese is a normal good and fewer crackers because crackers are an inferior good. So, both outcomes lead Mario to consume more cheese and fewer crackers. 2. Economist George Stigler once wrote that, according to consumer theory, "if consumers do not buy less of a commodity when their incomes rise, they will surely buy less when the
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Lesson 10 Assignment 2 - Ashley B. Hilliard 258-10-0169...

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