MECON PS5 sol

MECON PS5 sol - Microeconomics Problem Set 4 Questions Due...

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Microeconomics Problem Set 4 Questions Due February 17 th , 2010 Winter 2010 ECON 100A THIS PROBLEM SET IS CONTAINS NON- MIDTERM MATERIAL, BUT SINCE THE CLASS IS CUMULATIVE THE PROBLEM SET WOULD BE GOOD PRACTICE FOR THE MIDTERM Professor Michael Noel University of California San Diego 1. Explain what happens to the individual’s happiness as price falls along a. A downward sloping ordinary demand curve for good X. Utility increases as price falls. b. A Hicksian or compensated demand curve for good X. Utility is unchanged. 2. This question is about income and substitution effects, and in a mathematical way. a. Write down the Slutsky equation for the effect of a change in the price of good X on the consumption of good X. See your class notes. x/ p x = x h / p x – ( x/ E)x* b. Under what conditions will the ordinary demand curve for X be downward sloping? Explain your answer CAREFULLY by referring to the equation above. Be sure to tell me the signs of any expression in the Slutsky equation that you know and why you know it. The ordinary Marshallian demand curve is downward sloping if x/ p x < 0. We know that the slope of the Hicksian ( x h / p x , SE only) is always negative (or zero). So we need that x h / p x – ( x/ E)x* < 0, or that x h / p x < ( x/ E)x*. This occurs if the good is normal (so the right hand side is positive) or that it is negative (inferior) but not more negative than the left hand side. In other words, the good must either be normal or it must be inferior but not so inferior that the IE would dominate the SE.
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3. A consumer gets utility from two goods, X and Z. X and Z are normal goods and are gross substitutes for the consumer. Using budget lines and indifference curves, Explain and Illustrate the income and substitution effects of an increase in the price of X. Z
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MECON PS5 sol - Microeconomics Problem Set 4 Questions Due...

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