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Chapter%204%20Practice%20A - Chapter 4 Practice A 1 Suppose...

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Chapter 4 Practice A 1. Suppose Jane has an income of $40, the price of good X is $4, and the price of good Y is $4. She consumes a bundle that consists of 5 units of X and 5 units of Y each month. a. Now the price of X falls to $2. Jane decides to consume 7 units of X and 6.5 units of Y. Does Jane feel richer? Why do you think so? (4 points) b. Can you tell whether good X is non-Giffen or Giffen for Jane? (4 points) c. To support your answer in part (b), construct Jane’s demand curve for X. Is the slope of the demand curve consistent with your answer in part (b)? (4 points) d. Can you tell whether good X is normal or inferior for Jane? (4 points) e. Now Jane finds that the fall in the price of X has increased her purchasing power, so she decides to share it with her brother by sending him $12 each month for the rest of her life. Can she afford bundle A (what she had been consuming before the price and income changes)? (4 points) f. To maintain her utility level at U 1 after the price and income change, she decides to consume 8 units of X and 3 units of Y.
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