Question

2. Lucy wants to go on a special diet to lose weight. The diet requires 1 serving of protein and 10 servings of vegetables/fruits per meal. Lucy has a budget of $900 per month on food items. a. If the price for 1 serving of protein is $10 and 10 servings of vegetables/fruits is $20, how many meals will she buy? І, If the price for 1 serving of protein changes to $5 and 10 servings of vegetables/fruits is $20, how many meals will she buy? What is the income and substitution effect after the price change?

Answer 1

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Solution,

the meal of lucy contain 1 serve of protein and 10 serving of vegetable,

a).

the price of 1 serve of protein is 10 and 10 serving of vegetable is 20

the cost of a meal = 10 + 20 = 30

the budget of lucy is 900

Total Meal = 900/30 = 30

it contains 30 serves of protein and 300 serving of vegetable

b). if the price of a serve protein Reduce from 10 to 5

the price of 1 serve of protein is 5 and 10 serving of vegetable is 20

the cost of a meal = 5 + 20 = 25

the budget of lucy is 900

Total Meal = 900/25 = 36

it contains 36 serves of protein and 360 serves of vegetables.

The total effect is increase in 6 unit of meal

Income effect -

Due to a decrease in the price lucy can buy the 30 meals in 750 and the increase in real income is 150.

with the previous price, lucy can buy 5 meals more in 150. 5 meals are the income effect.

Substitution effect

initially, lucy can buy 30 meals after the decrease in the price the meal becomes 36

the substitution effect = total effect - income effect = 6 - 5 = 1

1 meal is substitution effect.