Short Answers Suppose you derive utility from Food (F) and Clothing (C). Your preference exhibits diminishing...

Short Answers

Suppose you derive utility from Food (F) and Clothing (C). Your preference exhibits diminishing MRS between F and C. Let’s put F on the Horizontal axis and C on the vertical axis.

a. If price of Food increases, show the IE and SE on a separate diagram if F is a normal good.

b. If price of Food increases, show the IE and SE on a separate diagram if F is an inferior good.

c. If price of Food increases, show the IE and SE on a separate diagram if F is a Giffen good.

d. If price of Food decreases, show the IE and SE on a separate diagram if F is a normal good.

e. If price of Food decreases, show the IE and SE on a separate diagram if F is an inferior good.

f. If price of Food decreases, show the IE and SE on a separate diagram if F is a Giffen good.

Please answer E and F

Expert Solution

In the diagram given below, AB is original line and AB1 is new budget line after price change. Food is on horizontal axis and clothing on vertical axis. mn line is parallel to new budget line which shows substitution effect.

In case of normal good, when price decrease quantity demanded in the market increases. Inferior goods also follow law of demand because quantity demanded have increased due to fall in the prices. But in case of Giffen goods ' law of demand is not followed. Here quantity demanded decreased due to decrease in price.

Answer A-D has been given below.

Rahul Sunny answered 2 years ago

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Short Answers Suppose you derive utility from Food (F) and Clothing (C). Your preference exhibits diminishing...

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