microbook_3e-page125 - Short answer questions on household...

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Short answer questions on household behavior and consumer choice The scenarios below describe how my consumption of beer and wine changes when my income changes and/or when the price of one or both goods changes. For each scenario, say whether my consumption is affected by: x an income effect, x a substitution effect, x a combined income and substitution effect x or no effect. and explain why! Each scenario is independent of the previous ones and independent of successive ones. In each scenario, I initially consume 50 beers and 50 wines. My initial income is $200. The initial price of beer is $2 and the initial price of wine is $2. 1. The price of wine falls to $1. The price of beer rises to $3. I increase my consumption of wine to 80 wines and decrease my consumption of beer to 40 beers. 2. The price of beer and the price of wine both increase to $4. My income rises to $400. I continue to consume 50 beers and 50 wines. 3. The price of beer and the price of wine both rise to $4. I decrease my consumption to 25 beers and 25
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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