Question

23. Suppose at $5 the quantity demanded for the download of Yo-Yo Ma's music from his “Piazzolla: Soul of the Tango” Album is 3 songs. If the substitution effect of the price decrease from $5 to $3 is 1 song, and the income effect is 3 songs, what impact will the price change have on the number of tracks consumers purchase from the Piazzolla's album? (2 points)

Answer 1

When price is $5, then 3 songs of Yo Yo Ma's music are downloaded from Piazzolla's album.

Hence, at P1 = $5, Q1 = 3 songs

Now, when price decreases from $5 to $3, then

✓ Substitution Effect is = 1 song.

✓ Income Effect is = 3 songs.

Now, songs are normal goods. Hence, both substitution and income effect will work at same direction. Both will be positive.

Hence, Total Effect due to decrease in price from $5 to $3 is

Total Effect = Substitution Effect + Income Effect

or, Total Effect = 1 + 3 songs

or, Total Effect = 4 songs

Hence, due to decrease in price, the consumers will download 4 more songs.

Consumers will download (3 + 4) = 7 songs at $3 price.

Due to the price change, consumers will download 4 more songs from Piazzolla's album. At price $3, consumers download 7 songs.

Hope the explanation is clear to you my friend.