Problem 1 Consider an economy with two goods only. For each part below draw a carefully labeled diagram showing the income and substitution effects for both goods. (a) The price of good 1 increases and both goods are normal. (b) The price of good 2 decreases and good 1 is normal while good 2 is inferior. (You may be tempted to use a clever trick and flip the axis so that you cann copy from a case we did in class, and in general this is perfectly fine, but for the sake of this exercise please leave good 1 on the x-axis and good 2 on the y-axis).

Problem 1 Consider an economy with two goods only. For each part below draw a carefully labeled diagram showing the income and substitution effects for both goods. (a) The price of good 1 increases and both goods are normal. (b) The price of good 2 decreases and good 1 is normal while good 2 is inferior. (You may be tempted to use a clever trick and flip the axis so that you cann copy from a case we did in class, and in general this is perfectly fine, but for the sake of this exercise please leave good 1 on the x-axis and good 2 on the y-axis).

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 5CQQ

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