Optimal Consumption Bundle & Total Price Effect Problem

Question Description

Note: For this question you are required to draw well-labeled graphs. Please make sure that the graph is large in size so that all the details can be easily noted. Suppose a typical consumer is trying to decide on her optimal consumption bundle by solving a constrained optimization problem. The utility function is U = U (x, y), and the price per unit of x and y are Px and Py, respectively.

The allowance of the consumer is denoted by M. In each of the subsequent cases, the price of x is going to change, and you will be required to draw graphs for each of these cases to show the magnitude of the substitution effect, the income effect and finally the total price effect. For all the graphs, plot good x on the horizontal axis. Case a: The price of x increases and assume that the good x is a normal good. Case b: The price of x increases and assume that the good x is an inferior good. Case c: The price of x decreases and assume that the good x is a Giffen good. A Giffen good is an inferior good, but for a Giffen good the magnitude of the income effect is larger than the magnitude of the substitution effect. Case d: The price of x decreases and assume that the good x is a normal good.

T6 – ECON 301 Due Date: Tuesday, 20th April 2021 Note: For this question you are required to draw well-labeled graphs. Please make sure that the graph is large in size so that all the details can be easily noted. Suppose a typical consumer is trying to decide on her optimal consumption bundle by solving a constrained optimization problem. The utility function is U = U (x, y), and the price per unit of x and y are Px and Py, respectively. The allowance of the consumer is denoted by M. In each of the subsequent cases, the price of x is going to change, and you will be required to draw graphs for each of these cases to show the magnitude of the substitution effect, the income effect and finally the total price effect. For all the graphs, plot good x on the horizontal axis. Case a: The price of x increases and assume that the good x is a normal good. Case b: The price of x increases and assume that the good x is an inferior good. Case c: The price of x decreases and assume that the good x is a Giffen good. A Giffen good is an inferior good, but for a Giffen good the magnitude of the income effect is larger than the magnitude of the substite.

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