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Unformatted text preview: choose each month? e. Suppose that initially I = $300, and PD = $20/unit. If the price of DVDs falls to $10/unit, what will happen to the quantity of DVDs demanded (up or down, and by how much)? f. What will be the substitution effect (its magnitude and sign) of the price decline on the quantity of DVDs demanded? What will be the income effect (its magnitude and sign) of the price decline on the quantity of DVD’s demanded? 4. Consider a consumer that spends her money on two goods: X and Y. Use an optimal choice diagram to illustrate the utility‐maximizing response to each of the following shocks in case both X and Y are normal goods. Be sure to clearly indicate in each diagram both pre‐shock and post‐shock coordinates for the optimal bundle. a. An decrease in the price of good X b. An increase in the price of good Y c. A decrease in income 5. What is the difference between “normal goods” and “inferior goods”? Which type of good is likely to have the larger price elasticity of demand, all else equal? Explain. Hint: compare their income ef...
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