Review
4. Suppose there is a 10 percent increase in the prices of the
following products. Keeping in mind how large a fraction of a
typical consumer’s budget these items are likely to be, explain
whether you think the income effect in each case would be small
or large, and why.
a. salt
b. jeans
c. all fruits and vegetables
d. gasoline
e. mini-vans
f. rental apartments
g. luxury cars
h. all electronic equipment
i. vacations to Cuba
j. fee for one-day car rentals
5. In what situations do the substitution effect and the income effect
work in the same direction to produce a downward-sloping
demand curve? In what situations do they have opposing effects?
6. Use the following diagram of a market for potted plants to answer
the questions below about consumer surplus.