University of Manitoba Intermediate Microeconomics Worksheet

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Suppose the only goods you buy are X and Y .
Suppose that between Monday and Tuesday, the price of Y (not X!) falls
(while your income and the price of X remain fixed). Draw a diagram,
with X on the horizontal axis and Y on the vertical, to illustrate how
your budget line moves.
1. Illustrate your optimum points on the two budget lines, labeling
Monday’s optimum M and Tuesday’s optimum T.
Now suppose that on Wednesday, the prices of X and Y remain at their
Tuesday levels, but at the same moment your income falls by just
enough so that you are just able to afford the same basket that you
bought on Monday.
2. Draw your new budget line and your new optimum point. Label the
optimum W.
3. In terms of the locations of points M, T, and W, what does it mean
for X to be a normal (as opposed to inferior) good? What does it mean
for Y to be a normal good?
X is called a Neffig good if it is true that “when the price of Y goes up,
the quantity demanded of X goes up” (or equivalently, when the price
of Y goes down, the quantity demanded of X goes down”).
4. In terms of points M, T and W, what would it mean for X to be a
Neffig good?
5. True or False: Every inferior good is a Neffig good. Fully justify your
answer.
6. True or False: Every Giffen good is a Neffig good. Fully justify your
answer.
For additional practice questions, replace “you are just able to afford
the same basket that you bought on Monday” with “you are just as
happy on Wednesday as on Monday”

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Explanation & Answer:
4 pages

Tags:
microeconomics

Budget

optimum points

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