Question: Suppose that the only two goods you purchase are X and Y. One day the price of X goes down. a. Illustrate your old and

Suppose that the only two goods you purchase are X and Y. One day the price of X goes down.
a. Illustrate your old and new budget lines.
b. Illustrate the substitution and income effects on your consumption of X.
c. What is the direction of the substitution effect? Why?
d. If X is a normal good, what is the direction of the income effect? Why?
e. If X is an inferior good, what is the direction of the income effect? Why?
f. True or False: If X is an inferior good, then a fall in price must lead to a rise in consumption, but if X is a normal good, then a fall in price might lead to a fall in consumption. Justify your answer carefully in terms of income and substitution effects.

Step by Step Solution

★★★★★

3.48 Rating (165 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a The picture shows your old and new budget lines b The substitu... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

231-B-E-P-T (69).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!

Suppose the only two goods you consume are X and Y. On Tuesday, the price of Y (not X!) goes up. On Wednesday, there are no new price changes, but your income rises by just enough so that you can...

Suppose that the only two firms in an industry face the market (inverse) demand curve p = 100 Q. Each has constant marginal cost equal to 10 and no fixed costs. Initially, the two firms compete as...

Suppose that the only good you purchase is hamburgers, and that at the beginning of the year, the price of a hamburger is $2.00. Suppose you lend $1,000 for one year at an interest rate of 5 percent....

1 . ) Suppose that the only 2 goods you purchase are X and Y . One day the price of Y goes up . 1 . 1 . Show your old and new budget lines. ( 1 5 pts ) 1 . 2 . Illustrate the substitution and income...

1. Texas Roadhouse (TXRH) is rapidly expanding into new markets and had sales of $1,263M in 2012. Suppose you expect sales to grow at a 15% rate in 2013, but this rate will slow by 2% per year to a...

Income Statement of an interior design firm, Grand Designs, that makes money by selling hours (fees) and by selling furniture or other items (Sale of Goods). 1) Using the formula for Profit Margin,...

What are the facts in this case? The facts are the story of what happened (who, what, where, when) before the lawsuit. What is the problem that the parties can't resolve on their own? Use the opinion...

Why did Marvel have to file for bankruptcy? What is your assessment of Perelman's proposed restructuring plan - the one proposed in January 1997, not the one "floated" to analysts in November 1996....

I express my undying love for my wife through weekly purchases of roses that cost $5 each. A. Suppose you have known me for a long time and you have seen my economic circumstances change with time....

economics questions 10. The price of DVDs (D) is $20 and the price of CDs (0) is $10. Philip has a budget of $100 to spend on the two goods. Suppose that he has already bought one DVD and one CD. In...

In a new-venture evaluation, what are the four stages through which a proposal typically goes? Describe each in detail.

1. If Carvin experienced an increase in orders from its website over a period of two weeks, should it expand its production capacity to make sure it can handle increased demand in the future? Why or...

A woman owns a TV which she bought for $300. She is considering buying a better model for $450. Her neighbour offers her $200 for her TV. What is the opportunity cost of her rejecting this offer? A...

What are the things that only you can do that, if done well, can make a real difference in your work and personal life?

A firm is planning to manufacture a new product. The sales department estimates that the quantity that an be sold depends on the selling price. As the selling price is increased, the quantity that...

A manufacturing firm has received a contract to assemble 1000units of test equipment in the next year. The firm must decide how to organize its assembly operation. Skilled workers, at $22 per hour...

A grower estimates that if he picks his apple crop now, he will obtain 1000 boxes of apples, which he can sell at $3 per box. However, he thinks his crop will increase by 120 boxes of apples for each...

Problem 3-16 Calculating Financial Ratios [LO 2] Bethesda Mining Company reports the following balance sheet information for 2021 and 2022 : Based on the balance sheets given, calculate the following...

Please help me actually fill out the forms, I am lost on several parts of this question. 1A. Richard McCarthy (born 2/14/1967; Social Security number 100-10-9090) and Christine McCarthy (born...

A company is forecasted to generate free cash flows of $40 million next year ( t=1 ) and $70 million the year after (t=2). After that, cash flows are projected to grow at a 2.5% annual rate in...