11. Let u(x₁, x₂) = x₁02x₂0.8. Suppose the consumer initially has income levelm = 20 and the prices are p₁ = 4 and p2 = 1. Calculate the income andsubstitution effect when the price of Good 1 decreases to p₁ = 2. Based on yourcalculation, was the substitution or income effect larger for Good 2?

The price effect is divided into the substitute effect and income effect. For normal good, the…

Answered: 11. Let u(x₁, x₂) = x₁02x₂0.8. Suppose…

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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Similar questions

Jerry spends his entire budget on bread and gasoline. His preferences are complete, transitive, monotonic, and convex. For Jerry, bread is an inferior good that follows the law of demand. Moreover, his cross-price elasticity of demand for gasoline with respect to the price of bread is negative. Suppose the price of bread increases, all else constant. a. Create a chart to show the total, income, and substitution effects on bread and gasoline of the increase in the price of bread. b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to label each effect on your graph (or through the chart from part a) and plot bread on the x-axis and gasoline on the y-axis
consider a consumer who consumes only two goods :peas and beans. She has an income of K10, the price of beans is k0.20 while the price of peas is0.40.a) Draw the budget lineb) Suppose that the consumer consumes 30kg of beans. Assuming that she spends all her income, how many kgs of peas is she going to consume?c) Assume that the price of peas falls from k0.40 to k0.20. Assuming that the consumer still consumes 30kg of beans, find the new quantity of peas.d) After the decrease in price of peas to k0.20 assume that the consumer is just as well off as she was in (b) if she has an income of K7.60. However, with that income and the new price of peas, she would have consumed 20kg of beans. Find the quantity of peas she would have consumed in this case. Show it on the graph.
4. John has a utility for the quantity of sandwiches, Xs, and quantity of burgers, Xp, that he consumes, represented by the following equation: U(X,X) = XX His income is Y = $24. The price of a sandwich changes from X, = $1 to X, = $4 while the price of a burger remains at X, = $6. Solve for the compensating variation and equivalent variation associated with this price increase.

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