A consumer earns I a week and spends his entire weekly income on new dress shirts...
A consumer earns I a week and spends his entire weekly income on new dress shirts and ties, because these are the only two items that provide utility to him.
Further- more, he insists that for every shirt he buys, he must
also buy a tie (without the
ties, the new shirts are worthless and vice versa). Let Ps and Pt
denotes the price
of a shirt and the price of a tie, respectively.
(a) Derive the consumer's demand function for shirts and the
demand function for
ties.
(b) Derive the income elasticity of demand for shirts. Are shirts
normal goods or
inferior goods for the consumer? Explain.
(c) Derive the cross-price elasticity of demand for shirts with
respect to ties. Are
shirts and ties substitutes or complements? Explain.
(d) Suppose that the price of a shirt decreases from P's to
P''s.
The price of a tie and the consumer's income remain at Pc and I,
respectively. Let bundle A be
the consumer's choice before the price change, and bundle B be the
choice after
the price change. Decompose the substitution effect and the income
effect, and
explain the result.
Homework Answers
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A consumer earns I a week and spends his entire weekly income on
new dress shirts...
3) (4pts. Consider a consumer who spends all his income on two goods, say 804 that...
3) (4pts. Consider a consumer who spends all his income on two goods, say 804 that good 1 is an inferior good at the current prices and income). If the price and also the income of the consumer doubles, how does his demand for good at all. Explain. all his income on two goods, say good 1 and good 2. Assume ces and income). If the price of both goods double w does his demand for good 1 change, if...
(38pts) Suppose a consumer spends all of her income on only two goods, z and y. Her preferences o...
(38pts) Suppose a consumer spends all of her income on only two goods, z and y. Her preferences over these two goods are represented by the utility function u(r,y) min(, 4y). The price of good y is given to be S8. Her income and price of z are represented by m and ps, respectively. (a) (10 pts) Find the demand for good z as a function of m and pa. (b) (5 pts) Is good z ordinary or Giffen good?...
Assume that Clark spends his entire income on the purchase of two goods, X and Y....
Assume that Clark spends his entire income on the purchase of two goods, X and Y. If his income and the prices of good X and Y all double, Clark will double the purchase of goods X and Y buy more of good X and less of good Y buy less of good X and more of good Y buy less of both goods X and Y buy the same amounts of goods X and Y According to the law...
3. A consumer lives for two periods. His income in period 1 is Y, and his...
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A consumer uses his income I for the consumption of two goods ?1 and ?2. He maximises utility at given product prices ?1...
A consumer uses his income I for the consumption of two goods ?1 and ?2. He maximises utility at given product prices ?1, ?2. His preferences with respect to both products can be described by an ordinal utility function ?(?1,?2), which exhibits a decreasing marginal rate of substitution (normal preferences). Please indicate whether the following statements are right or wrong in this context. If a statement is wrong, then describe briefly what is wrong (one sentence). a) A double value...
4. A consumer has income I = 120. She consumes the goods V (Veggies) and M...
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Section A Question 1 (a) For an inferior good, decompose the effect of a price rise...
Section A Question 1 (a) For an inferior good, decompose the effect of a price rise into a substitution and income effect using the Slutsky decomposition approach. (10 marks) (b) Assume an individual has preferences represented by the fllowing utility function: U(X,Y) = 2x + Y. The price of good X is £3 and the price of good Y is £7. Show on a diagram where the optimal consumption of goods X and Y will be. (10 marks) (c) Suppose...
3) (4pts. Consider a consumer who spends all his income on two goods, say 804 that good 1 is an inferior good at the current prices and income). If the price and also the income of the consumer doubles, how does his demand for good at all. Explain. all his income on two goods, say good 1 and good 2. Assume ces and income). If the price of both goods double w does his demand for good 1 change, if...
(38pts) Suppose a consumer spends all of her income on only two goods, z and y. Her preferences over these two goods are represented by the utility function u(r,y) min(, 4y). The price of good y is given to be S8. Her income and price of z are represented by m and ps, respectively. (a) (10 pts) Find the demand for good z as a function of m and pa. (b) (5 pts) Is good z ordinary or Giffen good?...
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4. A consumer has income I = 120. She consumes the goods V (Veggies) and M (Meat), which have prices Py = 6 and PM = 4 respectively. (a) Use the above information and plug it into the budget re- striction: PV V + PMM = I. Illustrate it in a figure, with V on the horizontal axis. How does the budget line change if the price of M falls so that PM = 2? Show in the figure. (b)...
Section A Question 1 (a) For an inferior good, decompose the effect of a price rise into a substitution and income effect using the Slutsky decomposition approach. (10 marks) (b) Assume an individual has preferences represented by the fllowing utility function: U(X,Y) = 2x + Y. The price of good X is £3 and the price of good Y is £7. Show on a diagram where the optimal consumption of goods X and Y will be. (10 marks) (c) Suppose...
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