Question
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good Y increases. Which of the following effects is known with certainty (explain graphically)?
a) The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X.
b) The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y.
c) The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good X.
d) The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y.
Note: These are questions to practice the elasticity concept. You need to explain in economic terms (remember the discussions we had in the lectures, or you can go back to the recordings if necessary), so do not just report a number from your calculation, explain the economic reasoning behind. on, explain the economic reasoning behind.
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