Suppose that Joey has classical bow-shaped indifference curves (convex) that do not intersect the axes for...

Suppose that Joey has classical bow-shaped indifference curves (convex) that do not intersect the axes for two goods X and Y. Draw an indifference curve and a budget line for Joey showing an equilibrium consumption bundle and label it A. Assume that the price of good Y increases. Carefully sketch out the change in the equilibrium bundle, indicating the income and substitution effects, assuming that:

Y is a normal good.
Y is an inferior good, but not a Giffen good.
Y is a Giffen good.
Assume now that the optimal consumption bundles on both the original budget line

and the new budget line include 20 units of Y (Joey kept buying 20 units of Y even after the price of Y increased). Can you determine if Y is a normal or inferior good? What about good X? Explain.

Expert Solution

Rahul Sunny answered 2 years ago

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