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4. Suppose that the consumer initially chooses x-10, y 10 when Px-Pr-10, m-200. (a) Someone says that, according to the theory of revealed preference, if ps rises from 10 to px 15, the consumer will consume less of x. Is this correct? (b) If income is increased after the increase in ps (from 10 to 15) in (i), how large must this increase in income be so that the consumer can just afford his original bundle (x-10, y 10)? (c) If income is adjusted as in part (b), why will the consumer choose x3 10? (Provide the revealed preference argument for this.) What will happen to her choice of y? Illustrate in a diagram. d) Suppose that in (a) the consumer chooses x - 5 after the rise in px. If she would have chosen x 7 after the income adjustment in (b), (c), what is the income effect (on x) of the rise in ps in (a)?

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Answer #1

a) Yes, the consumer will consume less of good x because the budget line will pivot inward. So, the original budle is not affordable now.

b) The required income should be 15(10)+10(10)=250.

c) No, since that was affordable when the situation was of part a) but that was rejected.

d) This is shown by point b in the diagram.L66 13.33 12-5

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