Answer to Question #274746 in Microeconomics for Lily

Question

Afghanistan reported its first COVID-19 case on February 24, 2020. As the infection spread, the government tightened containment measures, including introducing screening at ports of entry, quarantine for infected people, and closure of public places for gathering. In May, it waived electricity bills of less than Af 1,000 (US$13) for a family residence in Kabul for two months. The decision benefited more than 1.5 million Kabul residents.

 Please draw a graph using budget line and indifference curve to indicate the subsitution effects and income effects for the families in Afghanistan after the government waived electricity bills. Assumed that there are two goods: electricity and other goods and services.

(2 points)

 Shortly explain if the electricity is normal goods or inferior goods. (1 point); and the sign of total effects is negative or positive? (1 point)

Answer 1

(a)

In the diagram on the left, there is a fall in the price of electricity as the government waves it out causing consumers(residents of afghanstan) to demand more. (movement along the demand curve).As a result, there is a fall in demand for the substitute that is other goods and services leading to less demand.

(b)it is an Inferior good since electricity demand increases with a fall in income. Its sign of total effect is positive