Question

There are only two things in the world, Apple Pie (A) and Bagels (B). Plot A on the horizontal axis. It is known fact that when the price of B decreased, Judy's consumption of A remains unchanged. Does Judy consider B or or normal? What about A? Use a graph to illustrate your answer. Be as complete as possible, as there may be more than one possible scenario. (Hint: Look at the income and substitution effects implied.)

Answer 1

Answer: there are a things in the world, Apple pie (A) Bagels (B). and cohen price of B decreased, Judy's consumption of A remains unchanged. Judy consides Bor normal and aboutA: Inferior Explanation: decreases, it refulte in when the price of a normal good an increase of purchasing power. • Income effect and substitution effect both act in same direction. of the good increase so both makes quantity demanded whose price has fallen. • Now in case of inferior good there is negative income

efferit cohich ook oposite to substitution effect. 1. so the net effect of price change depends on relative strengthe of two effects. Hence, here price of B has decreased but Judy's consumption remain unchanged which indicates that both effects have Ewal strengths in opposite direction so ő is an inferior good. Good À is a normal good Graph: Income and substitution effect. Ал IC BC inferior good)