ECON 11 Study Guide - Midterm Guide: Expenditure Function, Substitute Good, Peanut Butter
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Solution (i) false: it will depend on good x. If x is a gi en good, the negative substitution e ect of the price increase is more than outweighed by the positive income e ect, thus the demand for. X is increasing in the price. (ii) false: x and y could be either gross complements or gross substitutes. If they are gross complements, the negative income e ect always outweighs the substitution e ect, and the overall demand for y is decreasing in the price of x. If they are gross substitutes, the substitution e ect outweighs the income e ect, and the demand for y is increasing in the price of x. Graphically explain the e ect in the budget constraint of an increase in an individual"s income without changing relative prices. Explain the impact on the quantity demanded of both goods. The budget line shifts parallel when the income changes and the price ratio remains the same.
