Question

2. Answer true, false, or it depends. Explain your answer using indifference curve analysis for a, b, and e, and using the formula for price elasticity of demand for (c) and (d).

a- Suppose that X and Y are perfect substitutes, MRS_xy = 3, P_x = $4, P_y = $2, and I = $10. Then, the consumer will spend all her income on good Y, purchasing 5 units.

b- For an inferior good, the substitution and income effects work in the same direction if the price increases but in opposite directions if the price decreases.

c- For two parallel demand curves, the one further to the right has a smaller price elasticity at each price.

d- When two demand curves intersect, the flatter of the two is more elastic at the point of intersection.

e- In a world with only 2 goods, X and Y, it is not possible for both goods to be inferior.

Answer 1