Answer to Question #79103 in Microeconomics for Albert

Question

c. Consider the market for brown rice and assume that this market is initially in equilibrium. Suppose that there is an increase in income and that brown rice is an inferior good. At the same time there is a decrease in the number of farmers producing brown rice. What happens in the market for brown rice given that the effect of the increase in income is stronger?

Answer 1

It is also true that whether a given household is a net rice producer or consumer depends on market prices. Higher prices will discourage consumption, encourage more production, and possibly convert some households from net consumers to net producers. Lower prices could do the opposite. Higher rice prices will substantially hurt poor net rice consumers because rice is typically a larger share of expenditures for the poor. In such circumstances, rice price increases can have important effects on effective purchasing power, even if they do not directly affect nominal income per se.