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2. Olivia has $200 to spend on good X (which costs $40 per unit) and good Y (which costs $20 per unit). a. Very carefully
2. Olivia has $200 to spend on good X (which costs $40 per unit) and good Y (which costs $20 per unit). a. Very carefully draw (using a ruler and sharp pencil or fine tipped pen) Olivia's budget constraint. State the algebraic expressions for both the X and Y 10 intercepts and show how they are calculated. U3 Uz b. Label the consumer's initial utility maximization "point A" in your diagram (and indicate with "X1" and "Y1" the quantities of goods X and Y that will be UI consumed). Fill in the blanks with numbers: When maximizing utility, Olivia will consume 10 X units of good X and units of good Y. c. Now draw a new budget constraint (in the same graph in a different color if possible) to represent a decrease in the price of good X to $20. State the algebraic expressions for both the X and Y intercepts and show how they are calculated. d. Label the new point of utility maximization "point B" (and indicate with "X2" and "Y2" the quantities of goods X and Y that will be consumed). Fill in the blanks with numbers: Now when maximizing utility, Olivia will consume units of good X and units of good Y.e. Fill in the table with two points on the demand curve for good X using information from above. Graph the demand curve in the lower diagram on the previous page- be sure to properly label the axes of the graph. You will need to determine reasonable increments to use on the axes Price Quantity A f. In the top diagram on the previous page, show and clearly label the substitution and income effects of the decrease in the price of good X to $20. Be sure to include and label an accurate decomposition line, label the total effect, the income effect and the substitution effect. This must be VERY neat and VERY well labeled. g. Is good X a normal or an inferior good? Explain using the definition of normal or inferior in your answer. Be sure to carefully state what is important to look at in the graph to determine your answer. h. Are goods X and Y substitutes or complements? Explain using the definition of substitute or complement in your answer. Be sure to carefully state what is important to look at in the graph to determine your
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