Figure 21-20 The following graph illustrates a representative consumer\'s prefer

Question

Figure 21-20 The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: Quantty of 20 19 18 17 16 15 14 13 12 10 246 8 10 124 16 820CACy Chips Refer to Figure 21-20. Assume that the consumer depicted the figure has an income of S50. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for chocolate chips if the price of marshmallows is $2.501? O a. p-$5.00, Q-3 O b.p-$2.50, Q-10 ° C. P-s5.00, Q-5 O d. p-s2.50, Q-6

Explanation / Answer

1. Ans: P = $2.50, Q = 10

Explanation:

It is seen from the figure that the optimum combination will be at point C. At this point The consumer is purchasing 10 units of both the goods, i.e., spending $25 ($2.50 * 10) on each good and the total spending is $50.

2. Ans: The income effect is positive.

Explanation:

If a good is normal, then a fall in price will cause both the substitution effect that and an income effect that is positive.

3. Ans: The price if X has fallen, a nd the price of Y has risen

Explanation:

From the secod figure, we can see that the coordinates of the budget line is (14, 0) and (42, 0). it menas the quantity of Y decreased from 40 to 14. It means the price of Y has risen. And, the quantity of X increased from 10 to 42. It means the price of X has fallen.

4. Ans: 1 / 2

Explanation:

The consumer's optimum combination is where, MRSxy = Px / Py. So, here MRSxy = Px / Py = 2 / 4 = 1 / 2.

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