PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 3, Problem 4P
To determine
Categorize the goods as complements, substitutes, or both.
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The following are correct statements about the Income Effect (IE) and Substitution Effect (SE) coming from an increase in Px, EXCEPT:
Question 7 options:
I.E. is the result of a decline in Purchasing Power on consumers coming from an increase in Px.
S.E. is the result of the substitution for alternative goods that the consumer implement as a result of an increase in Px.
If two goods are close substitutes, then SE is stronger than IE.
If two goods are complements, then IE is equal in proportion than SE.
2. A consumer is in equilibrium at point A in the accompanying figure. The price of good
X is $5. (LO2, L03)
a. What is the price of good Y?
b. What is the consumer's income?
c. At point A, how many units of good X does the consumer purchase?
d. Suppose the budget line changes so that the consumer achieves a new equilibrium at
point B. What change in the economic environment led to this new equilibrium? Is
the consumer better off or worse off as a result of the price change?
Product YA
45
40
35
30-
25
20
15 +
10
5
0
-
B
20
Product X
Steve spends all his income on meals at restaurants and paperback novels. His usual restaurant meal costs $20, and paperback books cost $10. When Steve’s monthly income is $250, he goes out to eat 10 times and purchases 5 books. When his income rises to $280, he goes out to eat 8 times and purchases 12 books. Determine whether the following statements are true or false:
Paperback books are normal goods
Restaurant meals are necessity goods
Paperback books are luxury goods
Chapter 3 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- On the graph below, the consumer begins at L1. The relative prices change to L2. Complete the table and the sentence below. (Hint: The dashed line is a reference line to show us the income effect. Point B shows only the income effect. The change from A to B is the income effect. The change from B to C is the substitution effect.) Porcupines consumed at ‘A’ Grenades consumed at ‘A’ Porcupines consumed at ‘C’ Grenades consumed at ‘C’ Will consumption of Grenades increase or decrease due to the income effect? Quantity change in Grenades due to income effect Will consumption of Grenades increase or decrease due to the substitution effect? Quantity change in Grenades due to substitution effect Will consumption of Porcupines increase or decrease due to the income effect? Quantity change in Porcupines due to income effect Will consumption of Porcupines increase or decrease due to the substitution effect?…arrow_forwardIn the market for electric cars, assume the following two events happen simultaneously: Increase inConsumer Preferences for Electric Cars: Due to growing environmental concerns, there is asignificant increase in consumer preference for electric cars over gasoline cars. This change leads tomore consumers wanting to buy electric cars. Advancement in Battery Technology: At the same time,there is a major breakthrough in battery technology. This advancement makes it cheaper and moreefficient to produce electric cars, leading to a decrease in the cost of production for manufacturers.Based on these two events: a) Explain how each event affects the demand and supply curves forelectric cars. b) Predict the overall effect on the equilibrium price and quantity in the market forelectric cars. Please submit your answers with the appropriate supply and demand figure below.Make sure to label the axis (what is measured along them), and the lines in the figure (demand andsupply), and show how those two…arrow_forwardConsider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)?arrow_forward
- I am studying for a midterm and would like help explaining the questions. Suppose Craig considers oranges and grapefruits to be perfect substitutes. Craig is willing to trade three (3) oranges for one (1) grapefruit. Craig has $24 to spend on oranges and grapefruits, and the price of oranges is PO = $1.00, and the price of grapefruits is PG = $2.00. On a graph, draw Craig’s Budget Constraint, identify Craig’s optimal bundle, and draw the Indifference Curve that goes through that bundle. Please put the quantity of oranges (O) on the vertical axis, and the quantity of grapefruits (G) on the horizontal axis. Make sure your graph is accurate and properly labeled and be sure to clearly indicate which is Craig’s Budget Constraint and which is Craig’s Indifference Curve.arrow_forwardConsider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)? How much units will increase for both x₁ and x₂?arrow_forwardQuestions 6 (Demand). When the price of x1 is $8 and the price of x2 is $5, Jenny consumes 20 units of x1 and 10 units of x2. Suppose that when the price of xX2 increases to $7, Jenny consumes 25 units of x1. a) What type of goods are x1 and x2? b) How many units of x2 does Jenny consume after its price increases? Hint: Calculate her income with the first allocation of goods. Questions 7 (Slutsky Equation and Consumer Surplus). Robert's utility function for x and xa is:arrow_forward
- Cindy consumes goods x and y. Her demand for x is given by x(px, m) =0.05m −5.15px. Now her income is $419, the price of x is $3, and the price of y is $1. If the price of x rises to $4 and if we denote the income effect on her demand for x by DI and the substitution effect on her demand for x by DS, then Please explain how the income and substitution effects are derived for Cindy. a DI = −0.28 and DS = −0.52. b DI = −0.28 and DS = −4.88. c DI = −0.52 and DS = −0.52. d DI = 0 and DS = −2.00.arrow_forwardSienna gets a total of 20 utils per week from her consumption of pizza and a total of 40 utils per week from her consumption of yogurt. The price of pizza is $1 per slice, the price of yogurt is $1 per cup, and she consumes 10 slices of pizza and 20 cups of yogurt each week. Which of the following statements is correct regarding Sienna's current consumption of pizza and yogurt? Sienna should eat more yogurt and less pizza, as she is getting more utils from the $20 spent on yogurt than from the $10 spent on pizza. Sienna should eat more pizza and less yogurt, as she is getting more utils from her last dollar spent on pizza than her last dollar spent on yogurt. We cannot determine if Sienna is maximizing her total utility with the information provided. Sienna should eat more yogurt and less pizza, as she is getting more utils from her last dollar spent on yogurt than her last dollar spent on pizza.arrow_forward3. As the owner of an ice-cream store, you believe it is necessary to purchase another ice-cream maker to meet the increased demand. You need to take a loan to finance it. The loan officer tells you that your revenues of $750,000 are insufficient to support additional debt. To qualify for the loan, your revenues need to be $50,000 higher. To generate additional revenue, you collect data on the price (in cents) per pound you charge customers and the related quantity of ice-cream consumed per year in pounds. The information is saved in HW3_2.xlsx. Use these data to estimate the log-linear demand specification to obtain least squares estimated of the demand for ice-cream. Write an equation that summarizes the demand for ice cream, and then determine the percentage price increase or decrease that is needed in order to boost revenues by $50,000.arrow_forward
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