Question

a consumers income is $100. prices of goods X and Y are $1 per unit. suppose the consumer facing such prices chooses the bundle that includes 60 units of good Y. next, the price of good X increases to $2 per unit. the consumer's new choice involves a bundle with 40 units of good X. is X a normal good,an inferior good,or is there insufficient information to answer this question? explain using a graph and the concepts of income and substitution effects.?

Answer 1

Since, we can see that as price of good X increases from $1 per unit to $2 per unit the demand will remain at 40 units. Since only price information is given nothing is mentioned that How income will change as price changes and also Utilitu Function is not given we can not say whether the good is inferior or normal.

Ques. Initially, Income Pe = = $100 $1 Budget Line Equation Pr. Qx & ly. ay = I 1.Q2 + . pQy = $100 x + ay = 100 Qxt to =100 ГРx = +0 ) Hence, Initial Bundle is (40, 60) As mentioned now, Pe=$82 jouit ly= & . I = $ 100 Budget sine eq? fx. Que of Py. Qy = I 2. Que + 1. Qy - Loo 2.40 + 1 . Qy - 100 Bundle is (40,20) lay= 207

Hence there is insufficient information to answer this.

& Pecice Effect is the son of Substitution Effect and Income effect Income effect o Adjusting Puschasing Power, by keeping relative Price fato Constant As Price of a good Increases the purchasing Power will decline as a resuet les amount of good can be purchased by an Individual les adic xo no snal Good doxe co Inferter Good D1 goody Substitution effect: It means the change in demand due to change in relative prices keeping Purchasing power constant .... As Price Increases the given good will become costlier. Therefore, he will substitute it with goody Hence, Substitution Effect if . Always negative (both in Inferior good & In Hornal Good)

I The magnitude of both will docide the Price Effect PE = SE + LE = I've + I tue love) Initially, ŚË > IE as o resueet - Pace Effect is negative. Afferwards, Income effect start Dominalup Substitution effect. Hence magnitude of both will de fermine the Price offeer PE = -vet -vel [PE = -ve In Noonal 1 Good PE = -het (tue) - In case of bile in foviar Good.

@ In case guitial Budget dire Normeer 62 - IC final Budget Live Compensa keel Budget x x 122 B Price Effect XX, = SE X,X2 = IE X X2 = Price Effect
As you can here we need Indifference curve to show substitution effect and income effect.