Question

1. Suppose Oreos and Hydrox are perfect substitutes, one for one (Hydrox were chocolate cookies with vanilla filling that stood up better in milk than Oreos.). If Oreos currently sell for 50 cents and Hydrox sell for 75 cents, use both graphs and words to explain income and substitution effects that occur when the price of Oreos to rise to $1. (Hint: pay attention to the shape of the indifference curve for perfect substitutes.)

2. Suppose Voodoo Donuts and Stumptown Coffee are perfect complements, consumed together one donut to one cup of coffee. Suppose the price of a donut is $1 and the price of a cup of coffee is $3. Use both graphs and words to explain income and substitution effects when the price of coffee to rise to $4. (Hint: pay attention to the shape of the indifference curve for perfect complements.)

3. Suppose in college you consume only pizza and beer. (“pizza” on x-axis and “beer” on y-axis). Assume the price of pizza and beer both rise by 25%. Do you consume more pizza than before? Does the answer depend on whether or not pizza is a normal, inferior, or Giffen good? (Label clearly)


4. Suppose you consume only two goods: pogo sticks and hula hoops. Graphically illustrate income and substitution effects and graphically derive Hicksian and Marshallian demands for pogo sticks when the price of pogo sticks rises and:

(a) pogo sticks and hula hoops are normal goods.
(b) pogo sticks are Giffen and hula hoops are normal.

Answer 1

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