Question

Graphical Problems for Chapters 2-3

Assume X and Y are economic goods. Plot X on the x axis and Y on the y axis using graph paper. Assume income is $50 and the price of X is $2.50 and the price of Y is $5.00.   Draw the original budget line and show a utility maximizing interior equilibrium using an indifference curve.

1. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if both goods are normal.
2. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if X is inferior but not a Giffen good.
3. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if X is inferior and a Giffen good.
4. Draw a new budget line if the price of X rises to $4.00. Show using indifference curves the substitution and income effects if both goods are normal.
5. Draw a new budget line if the price of X rises to $4.00. Show using indifference curves the substitution and income effects if X is inferior but not a Giffen good .
6. Draw a new budget line if the price of X rises to $4.00. Show using indifference curves the substitution and income effects if X is inferior and a Giffen good .

Answer 1

Dear Student/ Learner, I have attached the solutions to your problems. For analysing the substitution and income effects, I have taken the generlalised price changes, this will help you understand the concept better and you can later on solve any kind of problems on this topic. I have drawn the diagrams meticulously and in the end I have summarised the results as well.

it was my great pleasure to help you solving this problem. I wish you best luck for your learning endeavour.
Happy Learning