Can someone verify these answers for me? 2. (15 points)- Good Y Good X Answer th

Question

Can someone verify these answers for me? 2. (15 points)- Good Y Good X Answer the following questions with reference to the diagram above. The budget line then rotates Assume that the consumer initially faces the budget line labelled BL. inward to BL2 a. What would have caused this change in the budget line? Using the labels on the graph, indicae the change in Good X that constitutes the substitution effect Sabu, XIndicatethecha inGoodXbatconstitutes the incon eefedt.-as Is Good X normal or inferior? How do you know?niss of Good X a Giffen God? How do you know?-we-A-giffen-404

Explanation / Answer

a. Increase in the price of good X leads to the budget line to rotate leftward.

b. Substitution effect is the change of output from X3 to X2. Increase in the price of good X induces the consumer to decrease the consumption of X and substitute the consumption of X with Y. Substitution effect leads the consumer to remain at the initial indifference curve.

c. Income effect is change in X from X2 to X1. Increase in price reduces the purchasing power of the consumer. Hence, income effect tells to reduce the consumption of X on a lower IC, IC2.

d. Good X is the normal good as the increase in price of good X reduces consumption due to both substitution and income effect. In case of inferior good, consumption of good X would increase in comparison to substitution effect due to increase in price of X. Therefore, Good X is a normal good.

e. Good X is not Giffen good as increase in price change reduces the consumption of good X , i.e, the price effect is negative.

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