Tutorial 3 - Individual _ Market Demand

Tutorial 3 - Individual _ Market Demand - quinine after it...

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(Chapter 4 including Appendix) Question 1 - Rat ional Consumption Rats like root beer, quinine not so much - but their consumption habits, as with most creatures - are affected by the relative price of root beer and quinine. Rats earn income running around a wheel, and initially they can afford 8 root beers or 16 quinine cans. A certain economist has given up on humans behaving rationally, and decides to run an experiment on these rats. The economist changes the price of quinine, so that rats can only afford 8 quinine cans. Please graph the appropriate budget constraints to illustrate the situation above. (Quinine on the x-axis) a) How does the relative price of quinine/root beer change? b) Experimental data reveals that prior to the increase in the price of quinine Ratty consumed 3 units of quinine, and after the price change Ratty consumed 4 units of quinine. Please explain why we would see Ratty consuming more
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Unformatted text preview: quinine after it has become more expensive. c) The experimental economist is a rather lazy fellow, and would like you to provide the relevant Hicks decomposition which would explain the results observed above. Please oblige with drawing the appropriate graph (scale is not important) and a detailed explanation to accompany your graph. Explain and label the relevant compensated budget line, income, substitution and total effects of the price change. d) Our lazy economist had heard that it might be useful to provide an Engel curve as well, but it's been a long time since he was in second year, and he can't remember what an Engel curve is, never mind why it might be useful. Please explain what Engel curves illustrate, why it might be useful in the given context and what slope you expect this Engel curve to have. e) The quinine experiment is referenced at http://en.wikipedia.org/wiki/Giffen_good Tutorial 3 Page 1...
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