Question One - Consumer Behaviour (25 Marks)

(a)On a set of axis show Ms Customer (a utility maximizing consumer with well-behaved preferences) consuming a combination of good X and good Y.

(b)Show the effect on your diagram of a decrease in the price of good X. Assume bothgoods are normal goods.Be sure to explain the income and substitution effects.

(c)Describe(doNOTdraw a diagram) the income and substitution effects if good X in(b)above were an inferior good.

Assume Ms Customer spends $300 on two goods, good X and good Y. The price of good X (P_X) is $3, and the price of good Y (P_Y) is $6. Assume her MRS is Y/X.

(d)Use the information given above along with your own knowledge to calculate Ms Consumer's best affordable bundle.Show your working.

(e)Assume the price of good Y decreases to $4.Calculate Ms Consumer's new bestaffordablebundle.

(f)It is possible to calculate Ms Consumer's decomposition bundle. Explain what the decomposition bundle is, and what information you would need to be able to calculate it for Ms. Consumer.

(g)Explain the difference between a normal good, an inferior good and a giffen good.