Question

Assuming goods are normal, how will the following changes affect the optimal price?

            A. An increase/decrease in the number of substitutes.

            B. Buying a luxury versus buying a necessity.

            C. An increase/decrease in the budget share (for normal goods).

Answer 1

Answer

(A) If the number of substitutes available increases, then the demand for normal good falls and their price may fall. Whereas, the less number of substitutes available, the higher the prices of a good.

(B) Luxury has higher prices because they are having prestige value in the society, whereas necessity goods are having less prices so that it can be afforded by everyone.

(C) If the budget share increases then we would consume more of a good, and its price rises because of rise in demand.

If the budget share decreases, we would demand less good and hence pay less price.