ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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- Consider two different pairs of goods: a. Sunscreen and bug spray b. Hot dogs and hamburgers Which pair of goods are most likely complements? Which pair of goods are most likely substitutes? Which pair of goods most likely have fairly straight indifference curves? Which pair of goods most likely have very bowed indifference curves? Why? In which case will a consumer respond more to a change in the relative price of the two goods?arrow_forwardA consumer is always indifferent between one unit of good A and one unit of good B, no matter how much A or B she consumes. Initially A is cheaper. Then, the price of good A increases, but it is still cheaper than B. Discuss the substitution, income and total effect of this price change.arrow_forwardSergei splits his consumption between baseball bats and cameras. The price of baseball bats rises. If Sergei responds to this price increase by reducing his purchases of cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain. If Sergei responds to this price increase by purchasing fewer baseball bats but more cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain.arrow_forward
- The income effect of an increase in the price of a normal good that a consumer buys on a regular basis will be ___________ and the substitution effect will be _________.a) positive; negativeb) negative; negativec) negative; positived) positive; positivee) One cannot tell.arrow_forwardQuestion #3 Please explain what are the substitution and income effects (a detailed response is expected). Mark consumes two goods apples and oranges. If the price of orange increases from $2 to $4 and orange is an inferior good, please illustrate graphically the income and substitution effects. Please label your diagram carefully and provide explanation. Qd = 3300 – 2P and Qs = 500 + 8p Solve for: Price, Quantity and Market equilibriaarrow_forwardAssume the price of good A goes up and the consumer decreases purchases of good A and decreases purchases of all other goods. How might you explain this lack of substitution into other goods? The indifference curve for good A and other goods must be linear The income effect is greater than the substitution effect Good A is a luxury item Good A is inferiorarrow_forward
- Consider the increase in the price of a can of soda and assume that soda is a normal good. Describe how the income and substitution effects impact on the demand for the cola if its price increases. Also describe how these two effects interact for inferior goods if there is a fall in the price of the good. Use bullet pointsarrow_forwardBob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is €2 per pound, the price of oranges is €3 per pound, and Bob's budget is $24 per week. What is Bob's utility maximizing choice between these two goods? A. 12 pounds of apples and no oranges B. 8 pounds of oranges and no apples C. 4 pounds of oranges and 6 pounds of apples D. 12 pounds of oranges and no apples Fiona uses her entire budget to purchase food and clothing. The price of food is €1 per unit and the price of clothing is €2 per unit. Fiona's marginal utility from food is 2 and her marginal utility from clothing is 6. She currently spends all her money on food and clothing. Her objective is to maximise her utility. Which of the following statements is correct? Fiona should buy more food and more clothing. A. B. C. D. E. Fiona is currently maximsing her utility and should continue to consume her current…arrow_forwardPROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image* Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.arrow_forward
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