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- If income consumption curve is positively sloped, one good is inferior and the other good is normal both goods are inferior goods there is no income effect both goods are normal goodsThe 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.It is known that the indifference curve is convex. What does this tell you about the relationship between the goods?
- Give an example of normal goods that you think will become an inferior good when one day you earn a high income. Show your example using the Engel curve and explain.a) Jim buys gingerbread and candy, both of which are normal goods. When the price of gingerbread rises, the income effect induces Jim to buy _______ gingerbread and ________ candy. b) Jim buys candy and gingerbread, both of which are normal goods. When the price of gingerbread rises, the substitution effect induces Jim to buy_______gingerbread and________ candy.The price of pillows rises from $35 to $40 per pillow, while the price of sodas is unchanged. For a consumer with constant income of $15,000, show what happens to consumption of both goods (assume both goods are normal goods). Decompose the change into income and substitution effects
- Consider indifference curves for the consumption of milk and chocolates (you may assume that both are "goods"). The indifference curves are drawn with the number of chocolate bars on the horizontal axis and pints of milk on the vertical axis. Suppose consumer A has a flatter indifference curve than consumer B. In this case, we can conclude that: a. Consumer A likes chocolate more than consumer B. b. The price of milk relative to the price of chocolates is higher for consumer A than for consumer B. с. The indifference curves of the two consumers cannot cross. d. Given the same amount of chocolates, consumer A is willing to swap one bar of chocolate for a smaller amount of milk than consumer B.Give the definition of (gross) complements and substitutes. Draw the indifference curves associated with each. Give an intuitive example of each.Suppose Jeff has a perfect substitute preferences for watching movies (M) and TV (T) shows. Jeff's MRSTM is such that he is always indifferent between watching one movie and five TV shows independent of the amount of goods consumed. Which of the following statements is true? If Jeff had a choice between 1 movie and 1 TV show before bed, he would choose to watch the movie. If Jeff has already watched 3 movies and no TV shows, then he would prefer to watch a TV show next. He is indifferent between watching 1 TV show or 1 movie before bed. Jeff would prefer watching 2 TV shows and no movies over watching 2 Movies and no TV shows.
- The data presented in Table 1 below has the utility function schedule of an individual with an income of $500. The individual’s objective is to maximise utility when consuming two products – Rice and Legumes. Do the following a. Derive the Total Utility schedule for Legumes and the Marginal Utility schedule for Rice. b. Determine the equilibrium consumption of Legumes and Rice before the price change in Legumes c. Determine the equilibrium consumption of Legumes and Rice after the price change in Legumes d. Derive the demand curve for Legumes Units Consumed Legumes ($100) New Price of Legumes ($50.00) Rice ($50.00) TU MU MU/P MU/P* TU MU MU/P 0 0 0 0 1 1200 500 2 1000 900 3 900 1250 4 800 1550 5 600 1800 6 300 2000 7 200 2150Consider the consumer only consumes two goods namely flour and potatoes. Potatoes are aninferior good. Do you think that flour can also be inferior goods? Give your reviews. If the priceof flour falls, illustrate the impact on the consumption of flour and potatoes using substitutioneffect and income effect.2. Consider a consumer with Cobb-Douglas utility function U(2,) = a +5
