Answer to Question #221186 in Microeconomics for Vickie

Question

Demand function for good x of the form x x=10+M/10p and his original income of of 200 per day rather than the price of good x increased from 3 per unit 25 per unit calculate the total change in demand the income and substitution effect

Answer 1

Change in demand:

Given by: $= \frac {25}{3}= 8.3$

$\implies$ demand will be cut down to a value that will compare to the original demand by a ratio of 25 to 3.

The income remains constant at 200 per day.

Substitution effect- the consumer will have to shift to the consumption of a substitute of good x so as to get his usual satisfaction with same or original level of income. The demand for good x will hence reduce and the demand for the substitute good will increase.