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Handout 3 Answers: Utility Analysis
In the graph below for two different goods, Y and Z, there are two of the consumer’s
indifference curves, I1 and I2, and two budget constraints, B1 – the original budget
constraint, and B2 – the budget constraint after the indicated price change. Answer the
following questions with respect to this information.
a)
Indicate the change in the quantity of Y demand per period as a result of the
indicated change in the price of Y.
As Py ’s consumer buys more Y from Y1  Y2
b)
Indicate what portion of the change corresponds to the income effect and what
part corresponds to the substitution effect.
Y1  Y2 = Substitution Effect (Y)
Y2  Y3 = Income Effect (Y)
Y1  Y3 = Total Effect (Y)
c)
Is Y an inferior good? ____Yes___ Why?
As real income ’ed consumers purchased less Y.
c)
Is Z a substitute good? _____Yes__ Why?
As Py ’ed consumers purchased less Z.
Good Z
Z3
 C
Income
Effect
Total
Effect
Z1
I2
 A
Substitution
Effect
PY ’s
 B
Z2
I1
B2
B1
0
Y1
Y3 Y2
Substitution
Effect
Total
Effect
Income
Effect
Good Y