Answer to Question #59347 in Economics of Enterprise for kerry
hi i'm am trying to answer these two questions
1. A consumer splits their income equally between two goods. If the price of one good increases by 10% and their income increases by 5%, show that the consumer’s optimal consumption bundle will change despite them being able to afford their original bundle.
2. When estimating a demand function, explain why fitting a line of best fit through observed price and quantity combinations over time is not likely to yield good estimates.
however i cant seem to understand how to draw the graphs and explain them. so i will like to get the graphs for the first question with explainations which is 2 equilibrium graphs and the goodsX AND Y have to be normal and substitutes showing the old and new position of the graph after the income increase and price increase and the second question a basic demand curve but as a scatter graph. thanks
1) If a consumer splits their income equally between two goods and the price of one good increases by 10% and their income increases by 5%, then the consumer’s optimal consumption bundle will change, because as the budget line shift, the customer now can afford another indifference curve. The reason is that as the price of one good increases by 10%, then he will buy less of this good, and as the second good is now comparatively cheaper and the income increases, so the customer will buy more of this good. That's why the consumer’s optimal consumption bundle will change, even if it is possible to buy the same combination of goods. 2) Demand curve represents the relationship between the quantity of a product demanded and its price. It is usually downward-sloping. For a given product, a demand curve may be estimated by first conducting a survey and then performing a regression analysis.
A line of best fit is a straight line that best represents the data on a scatter plot may pass through some of the points, none of the points, or all of the points. As it is a straight line it gives only average estimates, so this method is not very correct for estimation of a demand function.