The income effect and substitution effect are concepts used in economics to analyze the changes in

consumption patterns due to changes in income or prices. Let's discuss the difference between the
income effect and substitution effect for Giffen, inferior, and normal goods:

1. Giffen Goods:

1. Giffen goods are rare and represent a special case where the income effect outweighs the
substitution effect. These goods have an upward sloping demand curve. When the price of a
Giffen good rises, its quantity demanded also increases. This contradicts the law of demand. In
this case:

- Income Effect: The income effect for a Giffen good makes consumers feel poorer due to the price
increase. As a result, they reduce their consumption of other goods and allocate more of their income
towards the Giffen good.

- Substitution Effect: The substitution effect suggests that as the price of the Giffen good rises,
consumers will choose to buy less of it and switch to substitute goods. However, in the case of Giffen
goods, the income effect dominates the substitution effect, leading to an increase in quantity
demanded.

2. Inferior Goods:

Inferior goods are those for which demand decreases when income increases. They have a negative
income elasticity of demand. Here's how the income effect and substitution effect work for inferior
goods:

- Income Effect: As income increases, consumers tend to purchase more superior goods, reducing their
consumption of inferior goods.

- Substitution Effect: The substitution effect suggests that as the price of an inferior good decreases,
consumers will switch to other more expensive goods, reducing their consumption of the inferior good.
However, the income effect dominates for inferior goods.

3. Normal Goods:

Normal goods are those for which demand increases when income increases. They have a positive
income elasticity of demand. The income and substitution effects for normal goods are as follows:

- Income Effect: As income increases, consumers have more purchasing power and tend to buy more of
the normal goods they desire.

- Substitution Effect: When the price of a normal good increases, consumers maychoosetoswitch to
cheaper substitute goods, reducing their consumption of the normal good. The substitution effect
reinforces the income effect for normal goods.

In summary, the income effect refers to the change in consumption patterns due to changes in income,
while the substitution effect is the change in consumption patterns due to changes in prices. For Giffen
goods, the income effect dominates the substitution effect, while for inferior and normal goods, both
effects are present but have opposite effects on consumption.
2....To determine whether Sagni should select stock market 1 or stock market 2, we need to compare
their expected returns.

For stock market 1, the expected return is 10%. This means that if Sagni invests in stock market 1, they
can expect to earn 10% of their investments

For stock market 2, the expected return is 15%. This means that if Sagni invests in stock market 2, they
can expect to earn 15% of their investment.To determine which stock market to select, Sagni needs to
calculate the expected return for each option:Expected return for stock market 1: 10% of 10,000 ETB =
0.10 * 10,000 ETB = 1,000 ETB.

Expected return for stock market 2: 15% of 10,000 ETB = 0.15 * 10,000 ETB = 1,500 ETB.

Based on the calculations, stock market 2 offers a higher expected return of 1,500 ETB compared to the
expected return of 1,000 ETB for stock market 1. Therefore, Sagni should select stock market 2 because
it has a higher potential return on investment.To determine if the given functions exhibit increasing,
constant, or decreasing returns to scale, we need to analyze how changes in inputs affect the output. If
doubling the inputs results in more than a doubling of the output, it exhibits increasing returns to scale.
If doubling the inputs results in exactly a doubling of the output, it exhibits constant returns to scale. If
doubling the inputs results in less than a doubling of the output, it exhibits decreasing returns to scale.

4........

Let's analyze each function one by one:

A. \( Q=3L+2K \)

This function has linear terms for labor (L) and capital (K). Doubling both inputs will result in a doubling
of the output. Thus, it exhibits constant returns to scale.

B. \( Q=(2L-2K)^{1/2} \)

This function involves the square root form. When inputs are doubled, the output will not exactly double
since it depends on the difference between 2L and 2K, which is not a linear relationship. Therefore, it
does not exhibit constant returns to scale.

C. \( Q=3LK^{2} \)This function has a term involving the square of capital (K). Doubling both inputs will
result in more than a doubling of the output since the K term is squared. As a result, itexhibits increasing
returns to scale.

D. \( Q=L^{1/2}K^{2} \)

Similar to the previous function, this function involves a non-linear relationship with the square root of
labor (L). Doubling the inputs will result in more than a doubling of the output. Hence, it exhibits
increasing returns to scale.Regarding the homogeneity of production functions, a production function is
considered homogenous if it satisfies the property of constant returns to scale. Functions A and C do
exhibit constant returns to scale, so they are homogenous production functions. Functions B and D do
not exhibit constant returns to scale; therefore, they are not homogenous production functions.A. To
calculate the expected utility of the new job, we need to multiply each possible outcome by its
corresponding probability and sum them up.

Let's denote the utility level associated with the new job's outcome as U.

If the job succeeds, the utility level will be 30 (from an income of 59,000 birr).

If the job fails, the utility level will be 15 (from an income of 20,000 birr).
The expected utility (EU) can be calculated using the following formula:

EU = (Probability of success * Utility of success) + (Probability of failure * Utility of failure)

EU = (0.6 * 30) + (0.4 * 15)

EU = 18 + 6

EU = 24

Therefore, the expected utility of the new job is 24.

B. The type of risk in this scenario is probabilistic risk since there are uncertainties regarding the
outcome of the job. The probabilities assigned to the success and failure outcomes indicate the
presence of risk.

C. To calculate the variance of the outcomes, we need to determine the expected value of the
outcomes, calculate the squared difference between each outcome and the expected value, multiply
each squared difference by its corresponding probability, and sum them up.

Let's denote the outcomes as X with corresponding probabilities P.

If the job succeeds, X = 59,000 birr with a probability of 0.6.

If the job fails, X = 20,000 birr with a probability of 0.4.

The expected value (E[X]) can be calculated as follows:

E[X] = (X1 * P1) + (X2 * P2)

E[X] = (59,000 * 0.6) + (20,000 * 0.4)

E[X] = 35,400 + 8,000

E[X] = 43,400

The variance (Var[X]) can be calculated as follows:

Var[X] = ( (X1 - E[X])^2 * P1 ) + ( (X2 - E[X])^2 * P2 )

Var[X] = ( (59,000 - 43,400)^2 * 0.6 ) + ( (20,000 - 43,400)^2 * 0.4 )

Var[X] = (15,600^2 * 0.6) + (-23,400^2 * 0.4)

Var[X] = (243,360,000 * 0.6) + (547,560,000 * 0.4)

Var[X] = 146,016,000 + 219,024,000

Var[X] = 365,040,000

Therefore, the variance of the outcomes is 365,040,000.