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1、Besanko&Braeutigam–Microeconomics,5theditionSolutionsManualChapter5TheTheoryofDemandSolutionstoReviewQuestions1.Whatisapriceconsumptioncurveforagood?Thepriceconsumptioncurveplotsthesetofoptimalbundlesfortwogoods,sayXandY,bychangingthepriceofonegoodwhileholdingthepriceoftheotherg
2、oodandincomeconstant.2.Howdoesapriceconsumptioncurvedifferfromanincomeconsumptioncurve?Thepriceconsumptioncurveplotsthesetofoptimalbundlesfortwogoodsasthepriceofonegoodchangeswhilethepriceoftheothergoodandincomeremainconstant.Theincomeconsumptioncurve,ontheotherhand,plotstheseto
3、foptimalbundlesfortwogoodsastheconsumer’sincomechangeswhileholdingthepricesofbothgoodsconstant.3.Whatcanyousayabouttheincomeelasticityofdemandofanormalgood?ofaninferiorgood?Withanormalgood,whenincomeincreases,consumptionofthegoodwillincrease.Thisimpliestheincomeelasticityforanor
4、malgoodwillbepositive.Withaninferiorgood,whenincomeincreasesconsumptionofthegoodwilldecrease.Thisimpliestheincomeelasticityforaninferiorgoodwillbenegative.4.Ifindifferencecurvesarebowedintowardtheoriginandthepriceofagooddrops,canthesubstitutioneffecteverleadtolessconsumptionofth
5、egood?Ifindifferencecurvesarebowedintowardtheoriginandthepriceof,say,goodXfalls,consumptionofXwillalwaysincrease;sothesubstitutioneffectwillalwaysbepositive.AdecreaseinthepriceofXimpliesthattheslopeofthebudgetlinebecomesflatter.Whenindifferencecurvesarebowedin,adirectconsequence
6、ofthischangeinrelativepricesisthatanytangencywilloccur“southeast”oftheoriginalbundlealongtheinitialindifferencecurve.Theonlywayforconsumptiontofallwhenpricefallsisfortheincomeeffecttobenegative(aninferiorgood)andforitsmagnitudetomorethanoffsetthesubstitutioneffect.Inthisraresitu
7、ation,thegoodisknownasaGiffengood.5.Supposeaconsumerpurchasesonlythreegoods,food,clothing,andshelter.Couldallthreegoodsbenormal?Couldallthreegoodsbeinferior?Explain.Iftheconsumerpurchasesonlythreegoodsandincomeincreases,itispossiblethatconsumptionofallthreegoodswillincrease.Fore
8、xample,theconsumermightallocateone-thirdofthein
