Question

Goods X and Y are perfect compliments (left and right shoes, computers and operating systems, etc.)....

Goods X and Y are perfect compliments (left and right shoes, computers and operating systems, etc.). Show graphically the substitution and income effects for a price increase in X

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

In case of perfect complements the goods are consumed in fixed proportions and the indifference curves are L shaped and we operate at the kink. Under perfect complements, the substitution effect is 0 and the entire price effect is made up by the income effect. This is given in the figure below. Thus the price increase causes the budget line to swing inwards and we move from the point A to the point B. As we operate on the kink the substitution effect is 0 and the entire change from X2 to X1 is due to the income effect.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Dan’s preferences are such that left shoes (good x) and right shoes (good y) are perfect...
Dan’s preferences are such that left shoes (good x) and right shoes (good y) are perfect complements. Specifically, his preferences are represented by the utility function U (x, y) = minimum{x, y}. (a) Draw several of Dan’s indifference curves. Which bundles are at the “kink- points” of these curves? (b) Assume that Dan’s budget for shoes is M = 10 and that the price of a right shoe is py = 2. Find and draw Dan’s demand curve for left...
Suppose it is possible to buy left shoes for a price of $35/shoe and right shoes...
Suppose it is possible to buy left shoes for a price of $35/shoe and right shoes for a price of $45/shoe. Alex has an annual budget of $1600 for buying shoes, and she has, like most people two feet. Draw Alex’s budget line between left shoes (on the horizontal axis) and right shoes (on the vertical axis). Draw a few of her indifference curves, and show her optimal choice. How many left shoes and how many right shoes does she...
Indifference curves for goods x and y can be right angles under A. Perfect substitutes B....
Indifference curves for goods x and y can be right angles under A. Perfect substitutes B. Perfect complements C. diminishing marginal rate of substitution D. rising opportunity costs
Consider a consumer whose utility function is u(x, y) = x + y (perfect substitutes) a....
Consider a consumer whose utility function is u(x, y) = x + y (perfect substitutes) a. Assume the consumer has income $120 and initially faces the prices px = $1 and py = $2. How much x and y would they buy? b. Next, suppose the price of x were to increase to $4. How much would they buy now?    c. Decompose the total effect of the price change on demand for x into the substitution effect and the...
Suppose you consume two goods, X and Y. Suppose also: • Y is a normal good....
Suppose you consume two goods, X and Y. Suppose also: • Y is a normal good. • When the price of X goes up, you increase your consumption of Y. Illustrate the income and substitution effects on your consumption of Y. Which effect is bigger? Justify your answer. please with a clear hand writing or typed thank you
Suppose X and Y are substitutes and are both normal goods. Assume X is on the...
Suppose X and Y are substitutes and are both normal goods. Assume X is on the horizontal axis and Y is on the vertical axis. If the price of X increase, which of the following will NOT happen? A) The slope of the income offer curve will become flatter B) The slope of the income offer curve will become steeper C) The Engel Curve for X will become steeper/ "shift" to the left D) The Engel Curve for Y will...
8) Suppose a consumer’s utility function is defined by u(x,y)=3x+y for every x≥0 and y≥0 and...
8) Suppose a consumer’s utility function is defined by u(x,y)=3x+y for every x≥0 and y≥0 and the consumer’s initial endowment of wealth is w=100. Graphically depict the income and substitution effects for this consumer if initially Px=1 =Py and then the price of commodity x decreases to Px=1/2.
You are a consumer who consumes goods X (education) and goods Y (recreation), where the price...
You are a consumer who consumes goods X (education) and goods Y (recreation), where the price of good X is PX and the price of Y is Py. Your income that can be allocated to purchase these two items is M. Question a. What happens if the price of education rises? Describe the substitution effect and the income effect. b. Derive the demand curve for education.
Xavier considers lemonade (X) and iced tea (Y) to be normal goods and has convex preferences....
Xavier considers lemonade (X) and iced tea (Y) to be normal goods and has convex preferences. a. (10 pts) Design an indifference curve-budget line diagram showing the substitution and income effects created when the price of lemonade increases. In your diagram, place lemonade on the horizontal axis and iced tea on the vertical axis. Identify the initial optimal choice as (X*, Y*) and the optimal choice after the price increase as (X**, Y**). b. (4 pts) How can you tell...
Consider a consumer choice model with two goods, X and Y. The consumer thinks X and...
Consider a consumer choice model with two goods, X and Y. The consumer thinks X and Y are perfect complements. When the price of X increases, the consumption of X also decreases. This change only consists of the income effect.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT