Problem Set 3 Solutions

1 is the income effect from part a and we multiply by

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Unformatted text preview: he total change in demand from part (b), 0.1 is the income effect from part (a), and we multiply by 2 because before the price change the consumer was buying 2 apples. In this case, however, the price increase is 0.1, so we have to multiply both terms by 0.1. Therefore S = -0.3*.1+0.1*.1*2=-0.01. That is, the substitution effect makes this person reduce his consumption of apples by .01 apples and the income effect makes him reduce it by 0.02 apples. d) The difference between the two substitution effects is that the Slutsky substitution effect holds purchasing power constant. This means that the consumer is given enough money so that she can still consume her original bundle A. The Hicks substitution effect holds utility constant. This means that the result of the substitution effect is another point on her initial indifference curve. 3. a) In the graph, E is the endowment point and A is the optimal consumption bundle. b) If the price of fish goes down, what is important for John’s welfare is if he is buying extra fish beyond what he catches or if he...
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This note was uploaded on 02/09/2014 for the course ECON 1130 taught by Professor Baum-snow during the Spring '11 term at Brown.

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