Problem
BOSTON COLLEGE Department of Economics EC 2201 Microeconomic Theory M. Kraus Fall 2018.
1. Consider the two-good consumer model in the case of perfect substitutes in a 1-1 ratio. Assume that I-10 and Py = 5.
(a) Suppose that Pk 10. What is the consumer's demand for X? Carefully sketch the consumer's equilibrium.
(b) Suppose that P 25. What is the consumer's demand for X? Carefully sketch the consumer's equilibrium.
(c) Suppose that Px 5. What is the consumer's demand for X?
(d) Carefully sketch the consumer's demand curve for X.
2. Consider a fall in the price of X in the standard two-good consumer model. Prove that if Y is a gross complement for X, then Y must be a normal good. You can arrive at an answer diagrammatically by considering the income and substitution effects of a fall in Px. If instead Y is a gross substitute for X, is it still true that Y must be a normal good?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.