Question

5. Goody 15 14 134 12 11- 10- 9-1 8-1 72 6 U BC вс 6 7 8 9 10 11 12 13 14 15 Good X From the figure, For an income of $15, the price of Y falls by ----, leading to a substitution effect of and an income effect of -

Answer 1

Answer- For an income of $ 15, the price of Y falls by 46 %, leading to a substitution effect of higher demand of both goods and an income effect of higher demand of both goods. For the normal good, the income effect and the substitution effect both work in the same direction, a decrease in the relative price of the good will result in an increase in quantity demanded both because the good is now cheaper than substitute goods, and because the lower price means that consumers have a greater total.

Initially consumer can buy maximum amount of good Y is 8 units.

Initial price of good Y = Income of the consumer / Maximum amount of good Y

                                = 15 / 8

                                 = 1.87

Initial price of good Y is $ 1.87.

If the price of good Y falls, consumer can buy maximum amount of good Y is 15 units.

After a fall in price of good Y =   Income of the consumer / Maximum amount of good Y

                                         = 15 / 15

                                         = 1

New price of good Y is $ 1.

Price of good Y falls by :

Percentage change in price = (New price of good Y - Initial price of good Y) / Initial price of good Y * 100

                                          = (1 - 1.87) / 1.87 * 100

                                          = (- 0.87) / 1.87 * 100

                                          = (-0.46) * 100

                                          = - 46                               (negative sign is showing price falls)

Price of good Y falls by 46 %.