Compute the price elasticity of demand for good x

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Reference no: EM1362005

The following figure shows a portion of a consumer's indifference map and budget lines. The price of good Y is $7.

Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II.

a. Write the equation for the demand curve. Sketch the demand curve for good X.

b. Compute the price elasticity of demand for good X between the two prices on the demand curve. Describe the price elasticity of demand for good X between the two prices. Using the idea of the price elasticity of demand, discuss what will happen to the consumer's total expenditures with the price change.

c. Determine the substitution effect, income effect and total effect. Explain your answer.

d. Calculate the income elasticity of demand for good X. Is good X a normal or an inferior good. Explain.

Reference no: EM1362005

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