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Zorluk: ZorIncome and Substitution Effects on Demand

A consumer experiences a fall in the price of Good Y. As a result, the substitution effect causes the consumer to buy 8 additional units of Good Y, while the income effect leads the consumer to buy 3 fewer units of Good Y. What is the net total price effect on the quantity demanded of Good Y, and how is Good Y classified?

  1. An increase of 5 units; Good Y is an inferior goodCevap
  2. B
    An increase of 11 units; Good Y is a normal good
  3. C
    A decrease of 5 units; Good Y is a Giffen good
  4. D
    An increase of 8 units; Good Y is a normal good

Cevap

An increase of 5 units in quantity demanded, classifying Good Y as an inferior good.
The total price effect is calculated by adding the substitution effect and the income effect: +8+(−3)=+5+8 + (-3) = +5 units. Because a fall in price increases real income, and this higher real income causes the consumer to reduce consumption of Good Y by 3 units, Good Y is an inferior good. However, since the positive substitution effect (+8) exceeds the negative income effect (-3), the overall quantity demanded increases by 5 units.

Adım Adım Çözüm

1
Calculate the total price effect
Total Effect = Substitution Effect + Income Effect = (+8) + (-3) = +5 units
The total price effect on demand is the algebraic sum of the substitution effect and the income effect.
2
Determine the direction of the income effect relative to the price change
A fall in price increases real purchasing power, but the income effect leads to buying 3 fewer units.
When an increase in real income leads to a decrease in consumption, the good is by definition an inferior good.
3
Compare the magnitudes of substitution and income effects
Substitution effect (+8) > Income effect (-3), so net quantity demanded increases (+5).
Since the substitution effect outweighs the negative income effect, the law of demand still holds, distinguishing a non-Giffen inferior good from a Giffen good.

Anahtar Kavram

Decomposition of Price Effect into Substitution and Income Effects for Inferior Goods
Tahmini Süre:2m 0s
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Konular

Income and Substitution Effects on Demand

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