Question

Figure 2 Beef jerky 20 18 - 16 14 - 12 10.44 - . . . ! BCBC TTTTT 1 2 3 4 5 6 7 8 9 10 V Scallops 2. (Figure 2) Answer the following questions. a. What are the income effect and substitution effect of the price change? b. Are scallops a normal good or an inferior good? c. Is beef jerky a normal good or an inferior good?

Answer 1

Bet Jesky Figuer 40-44 -- - - - . Ber - Be BR pscalledar? 22 (Figuez] a Hue the in ital budget line is Pa and the intral indifpunce cave is Us which is tagant to PQ at point it with respect to which consmption of scallops is 6 mit and consaption of Beet jesky is 8 mit. - Now due to an increase in the pure of scallops, budant live rotabo inward from PQ to PR and the new budget line becomes tunget to uz at point B with respect to which consmption of scallops is 2 mit and Conmption of But Junky is 12 mits. Now the movement from paint A to point B, s the totul eftut of an increase in the price of scallops. total effat can be decomposed into a substitution eftet and an income effat . Scanned with CamScanner

To mansand the substitution effect, we hold consuns real in come constant, hence the consma will stay on the sure indiftance Cave u, but as the price of scallops has increased, hence price ratio has changed hence he will stay on the budget line with its slope equal to the new budget line PR. Hace we draw a hypothetical budget line DE which is tangent to UI at point A' and is parallel to the new budy it line PR. Hace the to ful movement from A to A' along which consmption of scallops declins from 6 emits to suits and consumption of Beef Juky increases from 8 mits to 10:44 mits is due to the substitution effat. Now, the substitution effect for Scallops = decomposition buelle - juitial buelle) here decomposition budle at H'=(5, 10.44) and initial buelle at A= (638) Hace (5-6)=-1, hence as price of scallops increases, conster buys 1 less met of scallops due to the substitution effat. Now for Best Juity, substitution effect = (10.44-8] = 2.44 in't Huice as puce of scallop is increass Consues substitutio B scallops with Beet Juky and buys 2.44 Beet more en't of Junky due to the Substitution efbut. Scanned with CamScanner

Now to Indu stund the income effect, we considu real in come as vaniable. This as price of scallops increases, real income M ) falls and budget line Shifts lef tand from DE to PR which becom taged to Ud at point B and the new buble is (12, 12) Hace the income eftet for scallops = (final bundle - Deconposition buelle) = (2-5) =-3 Tus as, price of scallops in masu, consan buy s 3 less aults of scallops due to the encome effect. and in come effect for Beet Juky. -( 12-10:44) - 1.56 Hice as pure of scallops iveascs, consuun's real licone falls and consueen buys 1.56 more cent of Beef Juky due to the income eftut. b pace As inuease in leads to denean of scallops . in quantity of scallops due to fall in real income, hence scallops is a normal good. due to increase in price of Beet Juky as real in come falls, consmen buy's 1.56 more mit of - Beat Junky . Hince ball in real income leads to howard for Beet Juky. Hnce, Beef Juky is an interior good. Beef Juk demand for increase in cs Scanned with CamScanner