PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 3, Problem 4P
To determine
Categorize the goods as complements, substitutes, or both.
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A consumer’s budget set for two goods (X and Y) is 600 ≥ 3X + 6Y. (LO2)
a. Illustrate the budget set in a diagram.
b. Does the budget set change if the prices of both goods double and the consumer’s
income also doubles? Explain.
c. Given the equation for the budget set, can you determine the prices of the two
goods? The consumer’s income? Explain.
The following are correct statements about the Income Effect (IE) and Substitution Effect (SE) coming from an increase in Px, EXCEPT:
Question 7 options:
I.E. is the result of a decline in Purchasing Power on consumers coming from an increase in Px.
S.E. is the result of the substitution for alternative goods that the consumer implement as a result of an increase in Px.
If two goods are close substitutes, then SE is stronger than IE.
If two goods are complements, then IE is equal in proportion than SE.
Steve spends all his income on meals at restaurants and paperback novels. His usual restaurant meal costs $20, and paperback books cost $10. When Steve’s monthly income is $250, he goes out to eat 10 times and purchases 5 books. When his income rises to $280, he goes out to eat 8 times and purchases 12 books. Determine whether the following statements are true or false:
Paperback books are normal goods
Restaurant meals are necessity goods
Paperback books are luxury goods
Chapter 3 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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