Initially the price of good X is $1 and the price of good Y is $2.Income is $100
ID: 1156769 • Letter: I
Question
Initially the price of good X is $1 and the price of good Y is $2.Income is $100 per unit of time.Income decreases from $100 per unit of time to $50 per unit of time.X is an inferior good.
What happens to the slope of the budget line?
Is there a substitution effect? If so, how is the utility maximizing quantity of good X affected?
What happens to the X-intercept of the budget line? (Be specific)
What happens to the Y-intercept of the budget line? (Be specific)
Is there an income effect? If so, how is the utility maximizing quantity of good X affected?
Accounting for both the income and substitution effects, how is the utility maximizing quantity of X affected?
Explanation / Answer
A remains same because prices don't change
B There is no substitution effect because relative prices doesn't change
C it falls because less can be purchased with all income now
D it falls
E Yes there is income effect. Quantity of x utilized rises because it is an inferior good
F Again it rises as there is no substitution effect