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Difficulty: HardDeterminants and Changes in Demand

An economic study of consumer behavior in an urban market reveals that when household disposable income rises by 15%15\%, consumer purchases of local unpolished rice decrease by 8%8\%. Subsequently, the government grants a production subsidy to rice farmers, causing the retail market price of local unpolished rice to fall by 20%20\%. Based on economic principles governing demand determinants, which of the following correctly classifies local unpolished rice and describes the immediate effect of the price reduction on its demand curve?

  1. Local unpolished rice is an inferior good, and the price reduction causes a downward movement along its existing demand curve.Answer
  2. B
    Local unpolished rice is an inferior good, and the price reduction causes an outward (rightward) shift of its demand curve.
  3. C
    Local unpolished rice is a normal good, and the price reduction causes a downward movement along its existing demand curve.
  4. D
    Local unpolished rice is a complementary good, and the price reduction causes an inward (leftward) shift of its demand curve.

Answer

Local unpolished rice is an inferior good, and the price reduction causes a downward movement along its existing demand curve.
The correct response accurately identifies that a commodity whose demand decreases when consumer income rises is an inferior good. Furthermore, it correctly distinguishes that a change in the retail price of the commodity itself—resulting from a production subsidy—causes a expansion in quantity demanded reflected by a downward movement along the existing demand curve rather than a shift in the curve.

Step-by-Step Solution

1
Analyze the relationship between income change and quantity demanded.
Income rose by 15%15\% while demand for local unpolished rice fell by 8%8\%. An inverse relationship between consumer income and demand defines an inferior good.
By definition, normal goods experience an increase in demand when income rises, whereas inferior goods experience a decrease in demand as consumers switch to higher-quality substitutes.
2
Analyze the effect of the price decrease resulting from the farmer subsidy.
The subsidy lowers the price of the commodity itself, leading to an increase in quantity demanded represented by a downward movement along the static demand curve.
Changes in non-price determinants (income, tastes, prices of related goods) shift the demand curve (change in demand), whereas a change in the good's own price causes movement along the curve (change in quantity demanded).

Key Concept

Distinction between non-price demand determinants (which shift the curve) and own-price changes (which cause movement along the curve), alongside good classification by income elasticity.
Estimated Time:1m 30s
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Topics

Determinants and Changes in Demand

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