Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 4] CONSUMER DEMAND THEORY 91
4.31 In Fig. 4-27, the vertical axis measures a consumer’s money income while the horizontal axis
measures the quantity of X purchased by the individual per time period. Points C, D, and E
refer to different equilibrium points resulting when only the price of X changes. (a) What
would an indifference curve drawn on this set of axes show? (b) What does a clockwise rotation
from budget line 1 to budget line 2 and then to budget line 3 imply for the price of X? (c) What
type of demand curve can be derived from equilibrium points C, D, and E?
Fig. 4-27
(a) An indifference curve drawn on the set of axes in Fig. 4-27 would show the different combinations of
money (not spent on X and thus available to buy other goods) and the quantity of commodity X purchased
which yield equal satisfaction to this consumer.
(b) A clockwise rotation of budget line 1 to budget line 2 implies that the price of X doubled (since if
the consumer spent all of his income on X, he would be able to purchase exactly half as much of
X as before). Similarly, a clockwise rotation of budget line 2 to budget line 3 implies that the
price of X has doubled again.
(c) Joining points C, D, and E, we get this consumer’s PCC for commodity X. Since the PCC is horizontal,
d x would be unitary price-elastic over the arc defined. This is because as the price of X
rises, the consumer buys fewer units of X but continues to spend the same amount (exactly
one-half) of his income on X.
SEPARATION OF THE SUBSTITUTION AND INCOME EFFECTS
4.32 Panel A of Fig. 4-28 is identical to Fig. 4-8 in Example 14 except for budget line K 0 J 0 . Panel B is
derived from panel A and is identical to Fig. 4-9 in Example 15 except for d 0 x .(a) How was budget
line K 0 J 0 obtained? What does it show? (b) What does a movement from point E to point G in
panel A show? A movement from G to T? (c) How was dx 0 in panel B obtained? What does it
show?
(a) Budget line K 0 J 0 in panel A of Fig. 4-28 was obtained by shifting budget line KJ down and parallel
to itself until it was tangent to indifference curve II. By shifting budget line KJ down, we reduced
the consumer’s money income. By shifting budget line KJ down until it was tangent to indifference
curve II, we reduced the consumer’s money income just enough to keep real income constant. (Note
that according to this technique, the consumer’s real income is kept constant if this consumer
reaches the same indifference curve, before and after the price change. In the example we are discussing,
the consumer’s money income must be reduced by $3 in order to keep real income constant.)
Budget line KJ is shifted parallel to itself in order to keep the price of X in relation to the
price of Y the same on budget line K 0 J 0 as it was on budget line KJ.