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Suppose a consumer chooses between two types of flowers of his garden: tulips and roses. Graphically (no math needed) show the income and substitution effects for an increase in the price of roses given the following preferences. Graph tulips on the y-axis and roses on the x-axis. You should have a total of 4 separate graphs. (Hint: it may be that one or both of the effects are zero)

1. Tulips and roses are imperfect substitutes with convex indifference curves.

2. Tulips and roses are perfect substitutes. For this situation, consider 3 sub cases:

a. Tulips are more expensive than roses before and after the price change.

b. Tulips are more expensive before the price change and cheaper after the price change.

c. Tulips are cheaper before the price change.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91229884

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