Question

all AT&T LTE 10:04 PM 43% Personal Hotspot: 1 Connection 6.1 Illustrate the logic of the endow- ment effect using a kinked indiffer- ence curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the endowment changes. Use the diagram to explain why an individual whose endowment point is at the kink will only trade from the endowment point if the price change is substantial. *6.2 Why would a consumer's de- mand for a product change when the product price is quoted inclusive of taxes rather than before tax? Do you think fewer people would apply for a job if the salary were quoted after deducting income tax rather than in pretax form?

Answer 1

6.1 stors TC In the graph above, a kinked indifference curve is shown whose angle is greater than 90°. Given the budget constraint was B1 initially, such that the endowment of the individual was at the kink

Now, the price ratio changes and the slope of the budget line increases substantially, such that new budget line B2 is formed. Even though the prices changed and the slope has increased the individual will still trade at the same endowment. In this case, this increase in slope shows that the price of good x has increased and that of good y has decreased, stating that prices has changed substantially, due to these changes, the slope has increased as well. But the individual would still prefer the endowment Though, this type of indifference curve is usually of minimum function types, which are complements. An individual would prefer both goods rather than an extra of one good even though the price has changed substantially From this, it can be explained that an individual whose endowment point is at the kink will only trade from the endowment point if the price change is substantial

6.2 A consumer's demand for a product change when the product price is quoted inclusive of taxes rather than before tax. This can be explained using basic supply and demand relation. b

This relation here shows that before tax, price of a product tax, it has increased and reached to a new price p'. This increase in price leads to change in consumer's demand. p* for the consumer, but after was Yes, fewer people will apply for a job if the salary were quoted after deducting income tax rather than in pretax form. This is similar to the case above, but this time, people applying for a job forms the Supply curve, to them too their wages(P) have decreased, therefore fewer people will apply, decrease in Q from q* to q' due to income tax