# Econ2 Hw5
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1.
( a )
The limit on the consumption bundles that a consumer can afford
( b )
The rate at which a consumer is willing to trade one good for another
2.
( a )
Skis and ski bindings are complements, Coke and Pepsi are substitutes.
( b )
The indifference curves of Coke and Pepsi are fairly straight since they are perfect substitues.
The indifference curves of Skis and ski bindings are very bowed in because they are perfect complements.
( c )
Coke and Pepsi because they are perfect substitutes.
3.
( a )
( b )
Cosumption of pizza increases and the soda decreases.
Income and the two prices determine the budget constraint curve while the substitution effect is depicted as the equipotential line of satisfaction, aka indifference curves. To maximize satisfaction, the gradient vectors of the indifference curve and the budget constraint curve should be parallel at the optimum. This solution can be obtained using the Lagrange multiplier method. But In simple words, the higher the price rises the less you purchase, and vice versa.
( c )
**No**. The original optimum is outside of the new budget constraint.
4.
( a )
When the price of a giffen good rises solely, the effects of demand are as follow:
$TotalEffect>0>SubstitutionEffect$
$TotalEffect=IncomeEffect+SubstitutionEffect$
$IncomeEffect=TotalEffect-SubstitutionEffect>0$
The demmand rises as its price rises, hence **all giffen goods are inferior goods**.
( b )
Consider an inferior good price is to rise:
$IncomeEffect>0>SubstitutionEffect$
$TotalEffect=IncomeEffect+SubstitutionEffect$
The sign of total effect is undetermined since we don't have enough information about the relative size between income and substitution effects. If there exists a inferior good that has a relatively large substitution effect, than it would **not** be a giffen good.
5.
( a )
( b )
( c )
The Cup O'Soup is consumed more as a result of price rise. The substitution effect is to consume less while the income effect is to consume more and is the larger factor.
( d )
It's a giffen good.