Waldo consumes only apples and bananas. The price of bananas decreases, but there is also a...
Waldo consumes only apples and bananas. The price of bananas decreases, but there is also a drop in his income so that the bundle that he consumed before is just affordable. (Waldo has convex preferences, and he prefers more to less of either good.) a. After the change, Waldo will buy more bananas and fewer apples. b. After the change, Waldo will buy fewer bananas and more apples. c. After the change, Waldo will buy more of both goods. d. After the change, Waldo will buy fewer of both goods. e. We would need to know whether apples is normal or inferior good for him.
Homework Answers
Solution: After the change, Waldo will buy more bananas and fewer apples
Explanation: The above statement corresponds to the Hicks substitution effect, which is always negative. Hicksian substitution effect occurs on the same indifference curve as change in income of the consumer which keeps the consumer on the same indifference curve on which he was before the change in the price
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