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GRAPH_1. ear. 12.0. y. , Gallons per. BUDGET CONSTRAINT AND INDIFFERENCE CURVE. Wine, (W). Price-consumption curve. e. 3. 5.2. e. 2. 4.3. 3. I. e. 1. 2.8. 2. I. 1. I. 1. L. (. p. = $12). 2. 3. L. (. p. = $6). L. (. p. = $4). b. b. b. 0. 26.7. 44.5.

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4.3

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  1. GRAPH_1 ear 12.0 y , Gallons per BUDGET CONSTRAINT AND INDIFFERENCE CURVE Wine, (W) Price-consumption curve e 3 5.2 e 2 4.3 3 I e 1 2.8 2 I 1 I 1 L ( p = $12) 2 3 L ( p = $6) L ( p = $4) b b b 0 26.7 44.5 58.9 Beer (b), Gallons per year GRAPH_2 , $ per unit DEMAND CURVE b p 12.0 E 1 E 2 6.0 E 3 4.0 D1, Demand for Beer Beer (b), Gallons per year 0 26.7 44.5 58.9

  2. ear L3 y GRAPH_3 , Gallons per 2 L e BUDGET CONSTRAINT AND INDIFFERENCE CURVES Win 1 L Income-consumption curve e 3 7.1 e 4.8 2 I3 e 2.8 2 I 1 1 I 0 26.7 38.2 49.1 Bee r , Gallons per y ear , $ per unit GRAPH_4 r E E E 1 2 3 12 ice of bee DEMAND CURVE r P D3 2 D 1 D 0 26.7 38.2 49.1 Bee r , Gallons per y ear GRAPH_5 , Budget Engel curve for beer Y ENGEL CURVE * Y = $837 E 3 3 Y = $628 * E 2 2 Y = $419 * E 1 1 0 26.7 38.2 49.1 Bee r , Gallons per y ear

  3. F ood in f e r io r , housing no r mal 1 IC C 2 L F ood no r mal, housing no r mal 2 IC C F ood no r mal, 3 IC C housing in f e r ior GRAPH_6 ear y eet per f a Housing, Square b 1 L e c I F ood, P ounds per y ear

  4. 3 L Y 3 Income-consumption cu r v e 2 L Y 2 e 3 3 I e 2 2 I , Income E3 Y Y E 2 2 Engel cu r v e Y 1 E 1 Ham b urger per y ear GRAPH_7A ear y All other goods per BUDGET CONSTRAINT AND INDIFFERENCE CURVES 1 L Y 1 e 1 1 I Ham b urger per y ear GRAPH_7B Y3 ENGEL CURVE

  5. NORMAL GOOD CASE GRAPH_8 ear y L* , Units per s VD D vie o M D, 15 L1 L2 e* e1 e2 I1 I2 6 9 12 20 C , Music CDs Units per y ear Income effect = -3 Substitution effect = -3 Total effect = -6 = Substitution Effect + Income Effect = -3 + (-3)

  6. 2 L e 2 2 I e 1 1 I GIFFEN GOOD CASE I GRAPH_9A ear y ets per ck 1 L Ti etball, k Bas Total effect M o vie s , Ti ck ets per y ear

  7. 2 L e 2 2 I L * e 1 e * 1 I Substitution ef f ect Income ef f ect GIFFEN GOOD CASE II GRAPH_9B ear y ets per ck 1 L Ti etball, k Bas Total effect M o vie s , Ti ck ets per y ear

  8. Time const r aint 2 I 2 L – w 2 1 I e 2 Y 2 1 L – w 1 e 1 Y 1 N = 12 N1 = 16 2 H = 12 H = 8 2 1 age per hour w W 2 , w w 1 N = 12 N1 = 16 2 H = 12 H = 8 2 1 (a) Indif f erence Cu r v es and Const r aints GRAPH_10 y a , Goods per d Budget constraint and Indifference curves Y 1 1 0 24 N , Leisure hours per day 24 0 H, Work hours per day (b) Demand Curve GRAPH_11 E 2 Demand for leisure E1 Demand for leisure N, Leisure hours per day 0 H, Work hours per day

  9. L * e * Income and Substitution Effects of a Wage Change GRAPH_12 y Time const r aint a 2 I Since incomeeffect is positive, leisure is a normal good. 2 L , Goods per d 1 I Y e 2 1 L e 1 0 N * N N 24 N , Leisure hours per d a y 1 2 24 H * H H 0 H , W o r k hours per d a y 1 2 Substitution effect Total effect Income effect

  10. 3 L E 3 I 3 2 I E 2 e 3 2 L e 2 H H H H 2 3 2 3 Labor Supply Curve and Inferiority GRAPH_13 (a) Labor-Leisure Choice (b) Supply Cu r v e of Labor Supply curve of labor y a Time const r aint age per hour , Goods per d W , Y w 1 I E 1 1 L e 1 24 H 0 0 H 24 1 1 H , W o r k hours per d a y H , W o r k hours per d a y At low wages, an increase in the wage causes the worker to work more…. but at high wages, an increase in the wage causes the worker to work less….

  11. Relationship of Tax Revenue to Tax Rates

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