Question

Da Numer Entry questions Wort 2 points You have und alles See page 149 05 Question (2 points) Jamal consumes only two goods: lollipops and chewing gum. He treats these two goods as perfect substitutes with one lollipop being a perfect substitute for a pack of chewing gum, Initially, the price of a lollipop is $1.35, while packs of chewing gum are $3.38 each Jamal has $20 per week to spend on these two goods. Suppose the price of chewing gum decreases to $2.02. In your responses, give your answer to two decimal places. 1st attempt Part 1 (1 point) See Hint What is the substitution effect associated with the change in the price of chewing gum? packs of chewing gum Part 2 (1 point) See Hint What is the income effect associated with the change in the price of chewing gum? packs of chewing gum

Answer 1

IC PL And budget line 20= 1.35L + 3.38C La Lollipop and c= Chewing gum. and U=Ltc as both are perfect substitutes] slope of utility (u) curve ic'meet -1 slope of budget line - pe 338 1.35 - 2-5 So, slope of utility = 1 L slope of budget line so equilibrium will be out a where all income spent on Lollipop so C=0 and L= 20 = 1418 1.35 Now Pc = 2102 so, slope of budget line = 2:02 = 1.49 y slope of chility, So all income will be spent on lollipop only, and coo so substitution effect o packs of cheneing gum - Income effect o packs of chewing gum.