Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 6, Problem 3.3P
To determine
Income and substitution effect in inferior goods.
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Students have asked these similar questions
If a good is a Normal Good and its price decreases, what are the directions of the Substitution Effect and the Income Effect?
Both are increases
Both are decreases
The Substitution Effect is an increase while the Income Effect is a decrease
The Substitution Effect is a decrease while the Income Effect is an increase
Substitutions for goods cannot always be made. Which of the following is an example of a good that cannot be substituted with another good?
gasoline
jeans
cow's milk
cranberry juice
If the consumer is consuming exactly two goods, and she is always spending all of her money, can both of them be inferior goods?
Chapter 6 Solutions
Principles of Economics (12th Edition)
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Similar questions
- Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?arrow_forwardPlease see that attached photo.arrow_forwardA consumer is always indifferent between one unit of good A and one unit of good B, no matter how much A or B she consumes. Initially A is cheaper. Then, the price of good A increases, but it is still cheaper than B. Discuss the substitution, income and total effect of this price change.arrow_forward
- Two students, Nick and Sofia, are discussing normal and inferior goods. Nick says that if Frodo buys more beer when the price of beer goes up, then beer must be an inferior good for Frodo. If, on the other hand, he buys less beer when the price of beer goes up, then beer must be a normal good for Frodo. Sofia disagrees: "Normal and inferior goods are about income changes, not price changes. Therefore, we do not have enough information: beer could be an inferior or normal good in either of these cases." Do you agree or disagree? Carefully explain your point of view. Support your argument with graphs of income, substitution and total effects (please put beer on the horizontal axis and the other goods on the vertical axis). Please assume that Frodo's preferences over beer and other goods are strictly convex and satisfy "more is better" assumption.arrow_forwardGoods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units of good 2 per unit of good 1. If a consumer has an income of $720 and if the price of good 2 changes from $8 to $9, while the price of good 1 stays at $1, then the income effect of the price change is exactly twice as strong as the substitution effect. is 8 times as strong as the substitution effect. accounts for the entire change in demand. is 9 times as strong as the substitution effect. does not change demand for good 1arrow_forwardConsider the increase in the price of a can of soda and assume that soda is a normal good. Describe how the income and substitution effects impact on the demand for the cola if its price increases. Also describe how these two effects interact for inferior goods if there is a fall in the price of the good. Use bullet pointsarrow_forward
- When there is a change in price, there is an income effect and a substitution effect. Which is larger? The substitution effect or the income effect? Explainarrow_forwardThe figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, the substitution effect of the price increase is _____. −8 −7.5 −6 −9 −10arrow_forwardConsider two normal goods that are imperfect substitutes. Draw a diagram with Good 1 on the horizontal axis to illustrate the effect of a decrease in the price of Good 1 on the consumption of both Good 1 and Good 2. Does the substitution effect reinforce the income effect for both goods? Why or why not? Explain.arrow_forward
- Draw the following scenario: Assume that Sam has well-behaved preferences and consumes hamburgers (vertical axis) and steak (horizontal axis). Further, Talib perceives hamburgers as an inferior good and steak as a normal good. Draw the effect of a decline in the price of steak on Sam’s optimal consumption of hamburger and steak. Make sure you show both substitution and income effects on both goods (axes).arrow_forwardSuppose that a consumer has $200 to spend on two goods: beer and pretzels. The price of beer is $6.00 and the price of pretzels is $3.00. The price of beer decreases to $3.00. Because beer is now cheaper relative to pretzels, the consumer will want to consumer more beer and fewer pretzels. This is an example of which of the following? The income effect A giffen good The substitution effect Bowed indifference curvearrow_forwardexplain how utility analysis leads to the law of demand.arrow_forward
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