Answer to Question #269011 in Microeconomics for David

Question

Explain the following concepts.

a. Explain the substitution and income effects of a price change for a normal good and an inferior good.

b. List and explain three reasons why the demand for a good or service may be elastic. List and explain three reasons why the demand for a good may be inelastic.

c. Describe quantity and revenue responses to price changes when the price elasticity of demand (ϵ) takes on the following values:

(i) ϵ = 0,

(ii) 0 > ϵ > -1,

(iii) ϵ = -1,

(iv) ϵ < -1

Answer 1

A.The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices. ... Some products, called inferior goods, generally decrease in the consumption whenever incomes increase

.b.

.C (i) ϵ = 0,

(ii) 0 > ϵ > -1,

(iii) ϵ = -1,

(iv) ϵ < -1