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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

Show a consumer鈥檚 budget constraint and indifference curves for wine and cheese. Show the optimal consumption choice. If the price of wine is \(3 per glass and the price of cheese is \)6 per pound, what is the marginal rate of substitution at this optimum?

Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.

a. Show the effect of the frost on Maya鈥檚 budget constraint.

b. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the substitution effect outweighs the income effect for croissants.

c. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the income effect outweighs the substitution effect for croissants.

If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?

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

a. income

b. willingness to trade one good for the other

c. perception of two goods as substitutes or complements.

d. elasticity of demand

1. Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy鈥檚 consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.
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