Question

3. Kebbie spends all her income on good X and good Y. As the price of good X increases while the price of the price of good Y remains fixed, Kebbie's price-consumption curve is horizontal. a) Let the price of good Y be $1 per unit and Kebbie's income be M. Draw the diagram that illustrates the situation described above. b) Is good X a complement or a substitute for good Y? Explain. c) What is Kebbie's price elasticity of demand for good X? Explain.

Answer 1

YT I wo Pcc 3,07 budget line L Ma Panty [as Py=17 y = M-Pyx so, slape of budget line Px. chen Px increans budget line becomes Sleeper from MATO MB. of BD B A ex And Kebbie's price consumphon eneve is horizontal, I by when, price of good x dermany (Px deanears increases) consumphon of x decreases without affecting consumphan of good y. neutral to so so, dy's de =0, X and Y are each other. of price elasticity of se dx/x demand this - dx - must be 1 - dex/px . that means for a 1% change in price of good X (Px), there must be 1% den change in price of consumptram of good X-