Let the consumer begin in utility maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II.
a. Write the linear demand equation for good X. Sketch the demand curve for good X.
b. Calculate the price elasticity of demand for good X between the two prices on the demand curve. Describe the price elasticity of demand for good X between the two prices.
c. Determine the substitution effect, income effect, and total effect. Explain your answer.
d. Calculate the income elasticity of demand for good X. Is good X a normal or inferior good. Explain.
e. Calculate the cross price elasticity of demand between the two goods. Are the two goods substitutes or complements? Explain.
f. Write the linear generalized demand function for good X.