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Chapter 6: 7RQ (page 133)

Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain.

Short Answer

Expert verified

The increase in the price of cheese will induce the consumer to buy more cheese when the cheese is an inferior good.

Step by step solution

01

Income effect and substitution effect

The income effect states the change in real income with the price change. If the price increase, then real income falls. The substitution effect says that a rational consumer chooses a cheaper good when the price of the good increases. Thus, the demand for the good whose price increased should decrease.

The income effect implies a decline in real income due to increased prices; this should mean greater demand for inferior goods and reduced demand for normal goods.

02

Reason for increase in demand with an increase in the price of cheese

If cheese is an inferior good, the negative income effect can result in an increased demand even if the price of cheese increases. The inferior good consumption rise with the fall in real income, as stated in step 1. The income effect is greater than the substitution effect, and, hence, the demand for cheese increases.

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Most popular questions from this chapter

The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?

Consumption when young and consumption when old are both normal goods for Seymour, a worker saving for retirement. When the interest rate falls, what happens to Seymour’s consumption when old?

a. It definitely increases.

b. t definitely decreases.

c. It increases only if the substitution effect exceeds the income effect.

d. It decreases only if the substitution effect exceeds the income effect.

Question:At any point on an indifference curve, the slope of curve measures the consumer’s

a. income

b. willingness to trade one good for the other

c. perception of two goods as substitutes or complements.

d. elasticity of demand

At two points on an indifference curve,

a. the consumer has the same income.

b. the consumer has the same marginal rate of substitution.

c. the bundle of the goods cost the consumer the same amount.

d. the bundle of goods that yield the consumer same satisfaction.

A consumer has income of \(3,000. Wine costs \)3 per glass, and cheese costs $6 per pound. Draw the consumer’s budget constraint. What is the slope of this budget constraint?
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