dolution

 

1. Both diagrams below show the income and substitution effects of a rise in price from p0 to p1.In each case the substitution effect is illustrated by the change in quantity demanded from Q0 to Q the income effect is illustrated by the change in quantity demanded from Q∗ to Q1.

 

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a. On the diagrams for Goods X and Y, draw and label arrows that show the substitution effect and the income effect of the increase in price on quantity demanded. See

Figure 6-3 in the chapter for an example.

 

 

b. Is Good X a normal or an inferior good? Explain.

 

C. Is Good Y a normal or an inferior good? Explain.

 

d. For each of Goods X and Y, explain whether the income effect is working in the same direction or the opposite direction as the substitution effect.

 

e. For Good Y, how large would the income effect need to be for this to be a Giffen good? What would the demand curve look like in this case?

 
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