Answer to Question #211194 in Microeconomics for Umema

Question

Q4) a) Assuming that food is a normal good up to a certain level of income, show that an increase in price would

induce the substitution and income effects to move in the same directions. What would be the total effect on the

quantity of food.

b) Assuming that food is inferior up to a certain level of income, show that an increase in price would induce the

substitution and income effects to move in the opposite directions. What would be the total effect on the quantity of

food.

Answer 1

Answer.

a) The substitution effect provide that when the price of a food decreases,it is assumed that the buyer of the food income went up.Consumers tend to substitute away with other goods that are relatively more expensive than the cheaper goods. The quantity of the food will remain high as a cheaper alternative will be looked for.

b) In the case when food become inferior goods,the income effects donated the substitution effect and leads consumer to purchase more of the goods .They also have less of the substitutes when the price rise making it shift in the opposite direction.

What happens to the quantity of the goods is that the fall in the income will bring about an associated fall in quantity consumed.