Topic 4. Analysis of consumer behavior (5 hours)

Income Consumption Curve. Engel Curves

Price Consumption Curve

Income and Substitution Effects

Give the definitions to the following terms:

Income-consumption curve

Engel curve

Tornkvist figures

Price-consumption curve

Income effect

Substitution effect

Price effect

Answer the following questions:

1. What is the difference between Income Consumption Curve and Engel Curve?

2. What are the main kinds of goods are presented at Tornkvist figures?

3. What are the main approaches to decomposition of income and substitution effects and what is the difference between them?

4. What is the specific of general effect for Giffen goods?

Solve the following complex task (choose the variant according to the number in the list of the group):

Main Requirement to the Design of the Assignment

The assignment should be fulfilled in a strict accordance with the list of the tasks. Every part of the assignment devoted to a certain task must start with the appropriate number (1.1, 1.2, 1.3 etc.) except parts 1.5, 1.7, 1.11, 1.13. All the figures have to be drawn on the basis of the real data, computed before with regard to scale. All the axis and curves should be named. It is allowed to use pencils of different colors to graph curves.

Initial Data

All the calculation has to be performed on the following data that are given:

– consumer’s utility function is the same for every variant ;

– prices of good and good ;

– consumer’s income ;

– changes in consumer’s income ;

– changes in price of good .

The values of these parameters you can find in the pool of data enclosed according to his or her number of variants.

List of the Tasks:

In the assignment a student should fulfill the following tasks:

1.1. Write down the equation of the budget line. Graph the budget line in the Figure 1.

1.2. Compute the consumer’s equilibrium bundle (optimal choice of the consumer of goods X and Y).

1.3. Draw the graph of consumer’s indifference curve, that goes through the equilibrium bundle on the Figure 1 and mark the consumer’s equilibrium point (E₁).

1.4. On the basis of the data of individual variants, write down the equation of budget line when consumer’s income has changed.

1.5. Draw the graph of new budget line in the Figure 1.

1.6. Find out new consumer’s equilibrium bundle and draw the new graph of consumer’s indifference curve in the same Figure. Mark consumer’s new equilibrium point (E₂).

1.7. On the results got in the 1.6 build up:

– Income-consumption curve (Figure 1);

– Engel curve for the goods X and Y (Figure 2).

1.8. Analyzing the form of Engel curve that was build up define the character of goods X and Y (normal, inferior).

1.9. Suppose the price of the good X changes, write down the new equation of budget line.

1.10. Make the copy of the Figure 1 with initial budget line, indifference curve and consumer’s equilibrium point (E₁) depicted. Note the new figure as Figure 3.

1.11. Draw the graph of new budget line after the price of X has changed in the Figure 3.

1.12. Find out new consumer’s equilibrium bundle and draw the new graph of consumer’s indifference curve. Mark consumer’s new equilibrium point (E₃).

1.13. On the results achieved in the 1.12 build up:

– Price-consumption curve (Figure 3);

• Consumer’s individual demand curve on good X (Figure 4).

Make a conclusion about relationship between X and Y goods.