Answer to Question #125391 in Microeconomics for Adil Ahmed

Question

The following is a demand schedule for cheeseburgers for an individual.

PRICE OF

CHEESEBURGERS QUANTITY DEMANDED

5.00 0

4.50 1

4.00 2

3.50 3

3.00 4

2.50 5

2.00 6

1.50 7

1.00 8

0.50 9

a. Plot the demand curve for cheeseburgers, with price on the Y-axis, and quantity demanded per week on the X-axis.

b. Assume the individual has a fixed budget of £24 per week to spend on burgers, and the current price of cheeseburgers and chicken burgers is £3.00, and that a consumer buys 4 of each type of burger. Now assume that the price of cheeseburgers falls to £2. Using the concept of the ‘income’ and ‘substitution’ effect, explain why the demand for cheeseburgers rises to 6.

Answer 1

a)

b)

Income Effect:

The decrease in the price of the good leads to increase in the purchasing power of the consumer thus, the consumer demands more quantity of the given good.

Substitution Effect:

The decrease in the price of the good makes the given good cheaper as compared to its substitute goods. Thus, the consumer of its substitute goods starts consuming the given good. Thus, its demand increases due to substitution effect as well.

The cheeseburger and chicken burgers are substitute goods. Thus, the reduction in the price of the cheeseburgers attracts the consumers of the chicken burger. This is substitution effect. On the other hand, the reduction in the price of the cheeseburger causes to increase in the purchasing power of the consumer and it increases the demand of the cheese burgers. This is called income effect.