Question

11. Brady, who has ordinary-shaped indifference curves, buys 16 ounces of salt each year. Even when the price of salt doubles, Brady continues to purchase exactly 16 ounces. a. Use indifference curves and budget constraints to depict Brady's behavior graphically. Put salt on the horizontal axis and a composite good on the vertical axis. b. True or False (and explain): Salt is neither inferior nor normal to Brady. c. What is Brady's price elasticity of demand for salt? d. What can we say about Brady's income elasticity of demand for salt? e. What can we say about the substitution and income effects of a change in the price of salt?

Answer 1

Part A

composite good 16oz Salt

Part B

False, here the substitution effect is negative to keep the 16 ounces of bundle same, the income effect is positive. So, salt is an inferior good.

Part C

Here the price elasticity of demand for salt is zero. That is the change in price has not to impact on quantity demanded. That is demand is perfectly inelastic.

Part D

The income elasticity of demand is negative because salt is an inferior good.

Part E

Here both income and substitution effect is the same but opposite sign. So the total effect is zero.