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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”

Purchase answer to see full

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Explanation & Answer:

4 pages

Tags:

microeconomics

Budget

optimum points

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