Answer to Question #275141 in Microeconomics for Lily

Question

Afghanistan reported its first COVID-19 case on February 24, 2020. As the infection spread, the

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 Af 1,000 (US$13) for each family residence in Kabul for two

months. The decision benefited more than 1.5 million Kabul residents.

In May, it waived electricity bills of Af 1,000 (US$13) for each family residence in Kabul for two months. The decision benefited more than 1.5 million Kabul residents.

• Draw a graph using the budget line and indifference curve to indicate the substitution 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. 
• Explain if the electricity is normal goods or inferior goods, and the sign of total effects is negative or positive?

Answer 1

After the government waived electricity bills, people could consume more electricity and more other goods and services, so the budget line will sgift to the right and reach the higher level of the indifference curve. So, both substitution effects and income effects will be positive.

The electricity is normal good, and the sign of total effects is positive.