2. Substitution Effect vs. Income Effect (25 points) a. Give an example of normal goods that...

 

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2. Substitution Effect vs. Income Effect (25 points) a. Give an example of normal goods that you think will become inferior when you earn a high income one day. Show your example using the Engel curve and explain. (5 points) b. Show the substitution effect, income effect, and total effect of the condition of (1) normal good and (2) good. (10 points) c. Derive the conditions for normal and inferior goods in problem (b) into two demand curves. Which good has a more elastic demand curve? Explain. (10 points) 2. Substitution Effect vs. Income Effect (25 points) a. Give an example of normal goods that you think will become inferior when you earn a high income one day. Show your example using the Engel curve and explain. (5 points) b. Show the substitution effect, income effect, and total effect of the condition of (1) normal good and (2) good. (10 points) c. Derive the conditions for normal and inferior goods in problem (b) into two demand curves. Which good has a more elastic demand curve? Explain. (10 points)