Question

Construct graph and explain income and substitution effect of a price change for food

(on X-axis) and cloth (on Y-axis) when a) food is a normal good and b) food is an inferior

good. Suppose price of food is continuously decreasing, with no change in the price of cloth

and income, what curves can you derive from this change?

Answer 1

A rise or decline in the price of relative goods and services creates a substitute effect, influencing the food purchase demand. When there is an increase in relative good, the given goodwill's purchase automatically rises and vice-versa.