2 Debbie consumes only D (Donuts) and E (Eggs). Furthermore, it is known that she considers D and E to be "perfect complements" at a 2:1 ratio (i.e. 2 donuts has to go with 1 egg). Based on this, answer the following: a) Derive Debbie's demand for Eggs (you should get E as a function of M, PD and PE). b) Suppose Debbie's income is $100, while PD = $3 and PE = $4. How much D and E would Debbie be consuming? What is the elasticity of demand for E? What is the income elasticity of demand for E? What is the cross-price elasticity of demand for E? c) Suppose PE rose to $7. Graphically show the effect. Be sure to decompose into a substitution effect and an income effect. How much income is needed to compensate Debbie for the effect of the price increase? d) Derive her Hicksian Demand.
2 Debbie consumes only D (Donuts) and E (Eggs). Furthermore, it is known that she considers D and E to be "perfect complements" at a 2:1 ratio (i.e. 2 donuts has to go with 1 egg). Based on this, answer the following: a) Derive Debbie's demand for Eggs (you should get E as a function of M, PD and PE). b) Suppose Debbie's income is $100, while PD = $3 and PE = $4. How much D and E would Debbie be consuming? What is the elasticity of demand for E? What is the income elasticity of demand for E? What is the cross-price elasticity of demand for E? c) Suppose PE rose to $7. Graphically show the effect. Be sure to decompose into a substitution effect and an income effect. How much income is needed to compensate Debbie for the effect of the price increase? d) Derive her Hicksian Demand.
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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Transcribed Image Text:2 Debbie consumes only D (Donuts) and E (Eggs). Furthermore, it is known that she considers D and E
to be "perfect complements" at a 2:1 ratio (i.e. 2 donuts has to go with 1 egg). Based on this, answer
the following:
a) Derive Debbie's demand for Eggs (you should get E as a function of M, PD and PE).
b) Suppose Debbie's income is $100, while PD = $3 and PE = $4. How much D and E would Debbie be
consuming? What is the elasticity of demand for E? What is the income elasticity of demand for
E? What is the cross-price elasticity of demand for E?
c) Suppose PE rose to $7. Graphically show the effect. Be sure to decompose into a substitution effect
and an income effect. How much income is needed to compensate Debbie for the effect of the price
increase?
d) Derive her Hicksian Demand.
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