w10_ps3_econ100

# A show on a graph the income substitution and total

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a. Show on a graph the income, substitution and total effects of a increase in the price of software on the quantities of computers and software consumed. Be sure to clearly label all quantities, and the changes in these quantities associated with the income, substitution, and total effects of the price change. b. If the price of computers and the price of software both fall by 20%, illustrate and explain what happens to consumption of the two goods. Is there a substitution effect, an income effect, both or neither? 3. State what happens to consumption of two goods A & B from each of the following changes (consumption increases, decreases, or the change is ambiguous). Consumers allocate all income between two goods A and B, which are substitutes in consumption. a. The price of good B falls. b. The price of good B falls and the consumer is given a supplement to her income. c. The price of good A increases and the price of good B decreases. 4. Consider a consumer who receives all of her income for the next two years today, but must decide how much to consume from this income for both this year and next year. Any income not spent this year will earn interest for one year at the rate of 4%. The price of consumption this year (C1) is \$1, but due to inflation the price of consumption next year (C2) will be \$1.10.

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