Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90 degrees. Suppose that the prices change, so the slope of the budget line through the endowment changes. Use the diagram to explain why an individual whose endowment point is at the kink will only trade from the endowment point if the price change is substantial. Using the line drawing tool, graph a new budget line representing a price change such that the consumer's optimal bundle is unchanged. Label this line 'L².. Carefully follow the instructions above, and only draw the required object. Consumers might stick with the bundle of goods they currently possess in response to a price change because they place a value on a good if they own it than they do if they are considering buying it. Y, quantity of good y e₁ L¹ X₁ X, quantity of good x Q Q

Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90 degrees. Suppose that the prices change, so the slope of the budget line through the endowment changes. Use the diagram to explain why an individual whose endowment point is at the kink will only trade from the endowment point if the price change is substantial. Using the line drawing tool, graph a new budget line representing a price change such that the consumer's optimal bundle is unchanged. Label this line 'L².. Carefully follow the instructions above, and only draw the required object. Consumers might stick with the bundle of goods they currently possess in response to a price change because they place a value on a good if they own it than they do if they are considering buying it. Y, quantity of good y e₁ L¹ X₁ X, quantity of good x Q Q

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.9P

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