Problem 6 Chloe makes $$\$ 500$$ per week ... [FREE SOLUTION]

Chapter 5: Problem 6

Chloe makes $$\$ 500$$ per week and spends all her income on books and tea. Books cost $$\$ 25$$ Chloe buys 16 each week. Tea costs $$\$ 5$$ per cup, and Chloe buys 20 cups. When Chloe's income falls to $$\$ 450$$ per week, she cuts her consumption of books by 3 books and purchases 5 more cups of tea. Based on these figures, indicate whether each of the following statements is true or false, and briefly explain your reasoning. a. Books are an inferior good. b. Tea is a necessity. c. Books are a luxury good and tea is an inferior good.

Short Answer

Expert verified

a. False; b. False; c. True.

Step by step solution

Calculate Chloe's Initial Spending

Chloe initially spends on books and tea as follows:- Books: She buys 16 books at $ \\( 25 $ each, which costs $ 16 \times 25 = \$ 400 \).- Tea: She buys 20 cups at $ \\( 5 $ each, which costs $ 20 \times 5 = \$ 100 \).Her total spending is $ \\( 400 + \$ 100 = \$ 500 \), matching her income.

Calculate Chloe's Adjusted Spending

After her income falls to $ \\( 450 $, Chloe adjusts her purchases:- Books: She now buys 16 - 3 = 13 books, costing $ 13 \times 25 = \$ 325 \).- Tea: She buys 20 + 5 = 25 cups, costing $ 25 \times 5 = \\( 125 $.Her new total spending is $ \$ 325 + \$ 125 = \$ 450 \), matching her reduced income.

Analyze Books as a Good

Books are usually considered a normal or luxury good. Chloe reduces her book purchase when her income decreases, implying they are not inferior, as she buys fewer with less income. Thus, books are not an inferior good.

Analyze Tea as a Good

Tea can be analyzed to determine if it's a necessity or inferior good. Chloe buys more tea when her income decreases. Typically, for inferior goods, consumption increases as income decreases. This suggests tea might be an inferior good rather than a necessity.

Verify Statements

a. Books are an inferior good: **False**, because Chloe decreases her book purchases as income decreases. b. Tea is a necessity: **False**, as her tea consumption increases with decreased income, which contradicts the behavior of a necessity. c. Books are a luxury good and tea is an inferior good: **True**, since purchasing behavior aligns with luxury and inferior good characteristics respectively.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Inferior Good

In economics, an inferior good is a type of product whose demand increases when consumer income decreases. In Chloe's scenario, we notice that when her income fell from $500 to $450, she increased her consumption of tea. This behavior indicates that tea acts as an inferior good for her. People often purchase inferior goods when trying to maintain consumption levels despite having less income.

It's important to remember that whether a good is classified as inferior is relative to the consumer's preferences. What one person considers an inferior good, another might see differently.

Luxury Good

A luxury good is characterized by an increase in the percentage of consumer demand as income rises. These goods are not necessary, but their consumption usually brings about higher satisfaction or prestige. In Chloe's case, she reduced her book consumption when her income fell. This decreasing demand with a reduction in income hints that books can be considered a luxury good for her.

Luxury goods often represent a higher quality or more exclusive type of product, which consumers will buy more of as they have more disposable income. Conversely, they reduce their consumption as income decreases.

Necessity

Necessity goods are fundamental for basic living standards. They are the essentials, like food or some types of clothing, which typically do not see large changes in demand due to income shifts. In Chloe's case, since she cut back on books but increased her tea consumption when her income decreased, neither books nor tea fits the traditional role of necessity for her.

Necessity goods are largely stable in demand regardless of income changes, as they're things people must purchase. Thus, even as income falls or rises, consumption remains relatively constant, demonstrating a low-income elasticity of demand.

Income Effect

The income effect reflects the change in consumption patterns due to changes in consumer income. When Chloe's income fell from $500 to $450, she adjusted her purchasing behavior, reducing books and increasing tea, illustrating the income effect at play.

With the rise and fall of income, consumers adjust their buying habits. The income effect helps explain why Chloe buys fewer books and more tea as her financial situation changes. It shows the different impact of income on luxury versus inferior goods. Understanding this effect can provide insights into consumer choices and how they may prioritize purchases based on shifting income levels.

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