The Following Data Pertain to Products a and B, Both

question 53

Essay

The following data pertain to products A and B, both of which are purchased by Madame X. Initially, the prices of the products and quantities consumed are:
P_A = $10, Q_A = 3, P_B = $10, Q_B = 7.
Madame X has $100 to spend per time period. After a reduction in price of B, the prices and quantities consumed are:
P_A = $10, Q_A = 2.5, P_B = $5, Q_B = 15.
Assume that Madame X maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Madame X to put her back on the original indifference curve, she would consume this combination of A and B:
Q_A = 1.5, Q_B = 9
a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect.
b. Determine if product B is a normal, inferior, or Giffen good. Explain.

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Definitions:

No-fault Insurance

An insurance policy where policyholders are compensated by their own insurance company, regardless of who is at fault in an accident.

Collision Deductible

A collision deductible is the amount of money a policyholder must pay out-of-pocket for vehicle repairs before their insurance coverage pays for the remaining costs in case of a collision.

Annual Premium

The total amount paid per year for an insurance policy to remain valid and provide coverage.

No-fault Insurance

An auto insurance policy where each party's insurance pays for their losses regardless of who was at fault in the accident.