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ECON_W3211_PS4 - (b Suppose the price for red pencils is...

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ECON W3211.002 Intermediate Microeconomics Problem Set 4 Due Monday, October 11, 2010 1. Perloff, Chapter 5: 30, 34, 36 2. Suppose blue pencils and red pencils are perfect substitute for Jessie. Red pencils cost $10 per a piece, and blue pencils cost $5 per a piece, and Jessie’s income is $100. (a) What is Jessie’s optimal consumption bundle? Illustrate your answers in a graph.
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Unformatted text preview: (b) Suppose the price for red pencils is decreased to $4 per a piece. Does the change in her consumption reflect a substitution or an income effect? (c) Suppose the price for red pencils are the same as before, i.e. $10, but the price for blue pencils is decreased to $4 per a piece. Does this change in her consumption reflect a substitution or an income effect? 1...
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