Answer to Question #219630 in Microeconomics for LASHLEY

Question

Describe the equilibrium condition of a consumer who consumes Kenkey and fish when faced with a given income and relative prices of the goods.
Starting from equilibrium,how would the consumer respond to:

i.Arise in the price of kenkey?

ii.A fall in the price of fish?

Answer 1

When faced with a given income and relative pricing of the items, the equilibrium circumstances of a consumer that consumes Kenkey and fish are as follows:

·        Both commodities must have the same marginal usefulness per dollar.

·        When consumption rises, the marginal utility falls.

When the consumer is able to consume the most desired product package that provides him with the greatest utility, he will achieve a stable equilibrium.

i)                  When the price of kenkey rises, consumers will respond by buying more fish rather than kenkey, because the price of fish will remain constant while the price of kenkey will climb. This is the case because of substitution and income effects.

ii)                A decrease in the price of fish will cause the consumer to respond by purchasing more fish rather than kenkey since the price of fish will be more affordable, allowing the consumer to buy more fish and less kenkey due to the substitution and income impact.