I am studying for an Econ exam, and my professor posted a practice exam-with answers attached. I am having trouble with the short answer questions. Primarily, how he got to the answers. I am hoping an OTA can help show me how he derived the answers for the short answers (i.e draw some graphs). The answers are located at the back of the document.
Short answer 1.
See the attached file "demand." Each indifference curve represents a set of goods that would provide the same utility to the consumer. Each budget curve represents the different quantities of each good that can be bought with the same amount of money. In the example, we use bananas and apples. When the cost of apples falls from $6 to $4, the budget line moves outward along the apply axis. When the indifference curve is tangent to the budget line, it represent one distinct basket with set quantities of both goods that the consumer would most want given a certain income. If we graph these points, we obtain a demand curve.
Given that a rational person prefers to be on a higher indifference curve, we can prove that they cannot cross. See the attached file. The person prefers the A and B equally, since they are on the same cure. But if the curves cross, then it means he also prefers B and C equally, because they are on the same curve. This would mean that he prefers A and C equally, by the associative property. This violates our definition of indifference curves, that the higher one is preferred. See the attached file "crossing."
See the attached file "income." The graph shows the income and substitution effects of the fall in the price of good y from $4 (A) to $1 (C).The income effect dictates that real income is lower because the same nominal income buys less at the higher prices. For normal goods, then, the income effect of a price rise is negative. The substitution effect occurs when consumers substitute other goods for the one whose ...
derivation a demand curve using budget constraints and indifference curves