Problem 3 Consider an economy with two goods only. Use Slutsky decomposition for good 2 (Ar₂ = Ar + Ax₂) to prove the following: (a) If the price of good 1 decreases and good 2 is inferior, then good 2 is a gross substitute for good 1. (b) If the price of good 1 decreases and good 2 is normal, then under what condition is good 2 still a gross substitute for good 1? Under what condition is good 2 a gross complement for good 1?
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- In the United States, one of the largest welfare programs is the Supplemental NutritionAssistance Program (SNAP)1representing the second largest in-kind transfer programfor individuals in the US. From the abstract of the study we are told “[a] 1% increasein benefits per population raises grocery prices by a persistent 0.08%. A calibratedpartial-equilibrium model implies a marginal benefit dollar raises a recipient’s consumersurplus from groceries by $0.7, producer surplus by $0.5, and lowers each non-SNAPconsumer’s surplus by $0.05.” In other words, increasing the size of the in-kind transferleads to higher prices. This higher price results in a larger surplus for grocery stores anda lower consumer surplus for individuals not participating in SNAP. Those individualswho participate in SNAP can increase their overall consumer surplus as they haveaccess to more goods, despite the higher price. This result is estimated using thenearly 100% redemption of the SNAP benefits (i.e. assuming the…Derive and plot Madeline's demand curve for Coke if she views Coke and Pepsi as perfect substitutes. (Hint: The quantity of Coke consumed where the budget line hits the Coke axis is Y/Pc, where pc is the price of Coke, pp is the price of Pepsi, and Y is income.) Use the 3-point curved line drawing tool to draw Madeline's demand curve for Coke. To simplify the analysis, assume that if the price of Coke and the price of Pepsi are equal, then Madeline, though indifferent between the two, only consumes Coke. Label this curve 'Demand'. Carefully follow the instructions above, and only draw the required objects. C Price/can of Coke Pp Y Pc Coke, Cans per yearBartholomew and Agatha are each endowed with 15 units of food and 15 units of clothing. For Bartholomew, the two goods are perfect substitutes, i.e., UB = FB + CB. For Agatha, the two goods are perfect complements, i.e., UA= min{FA, 2CA). Do all of the following in just one graph or chart: Draw an Edgeworth box (with the correct dimensions). Note: Assign clothing on the vertical axis (label it "C") and food on the horizontal axis (label it "F"). Assign Agatha's origin at the lower left corner, while Bartholomew's at the upper right. Plot the endowment point and label it "@". Plot Agatha's indifference curve that passes through w. Label the indifference curve "Agatha". Plot Bartholomew's indifference curve that passes through w. Label the indifference curve "Bartholomew". Shade the region or set of all Pareto-improving allocations relative to w. What is its shape? Draw the contract curve and answer this: Is it a straight line or not? [Hint: The contract curve in this case does not need…
- Question3 a) Suppose a household is faced with the choice between consuming gasoline (G) and all other goods (OG). Today the household consumes 800 liter of gasoline a year.Suppose then that a gasoline price increase is perfectly compensated by a wage increase. If the family followed the utility maximization model, how would this affect their consumption of gasoline? Explain by using a figure. b) Explain by using an example why an MRS (Marginal Rate of Substitution) between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?How does the utility-maximization model help highlight the income and substitution effects of a price change. Provide an example please.(In this question we denote income by Y, not by W as in the lecture notes). The following figure shows the consumption of x and y for two market situations. We can conclude that: x is a normal good for all market situations. py is greater than px. It is not conclusive. x is an inferior good for some market situation. y is an inferior good for some market situation.
- Explain how non-convexity in choice can result in multiple optimal choices. Provide a graphical solution.a) Suppose demand for good X is given by QD = 900- p/2 where p is the price and QD the quantity demanded. Supply is given by QS = p/4. Suppose 60 TL tax is imposed on each unit ofX that is purchased. What is the burden of the tax? Explain the key factors that determine the incidence of the tax. b) Describe the main differences between partial and general equilibrium analysis in the context of examining tax incidence.a good is normal, then an increase in the price of the good will lead to which of the following to be true for this good? (Assume that there are only two goods, the individual's preferences lead to well-behaved preferences with strictly convex indifference curves and an interior solution for all budgets). Let SE = substitution effect, IE = income effect) (a) The magnitude of the IE for this good must be larger than the magnitude of the SE (b) The magnitude of the SE for this good must be larger than the magnitude of the IE (c) The good could be a Giffen good d) The good must be an ordinary good ( (e) None of the above
- Question) Prove that price effect = income effect + substitution effect through graphical representationSuppose consumer consume two goods. Can both goods be inferior? Can one of the goods be inferior? Explain your reasoning clearly. 19Choose one of the answers from the five choices provided. And please, also provide a brief description, explanation or argument for your choice. Thank you Bartleby! 3. Assuming that consumption and leisure are normal goods, working hours will decrease when wages increase if: (A). The income effect dominates the substitution effect.(B). The substitution effect dominates the income effect.(C). If the income and substitution effects move in the same direction (for example, if both have the same sign).(D). If the income effect and the substitution effect move in opposite directions (for example, if they have different signs).(E). The increase in wages is accompanied by an increase in prices.