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Chapter 6: 8QQ (page 133)

Mr. Burns buys only lobster and chicken. Lobster is a normal good, while chicken is an inferior good. When the price of lobster rises, Mr. Burns buys

  1. less of both goods.

  2. more of lobster and less chicken.

  3. less lobster and more chicken.

  4. less lobster, but the impact on chicken in ambiguous.

Short Answer

Expert verified

The correct option is (c): less lobster and more chicken.

Step by step solution

01

Normal good and Inferior good

Normal goods are those goods whose demand increases with the increase in consumer income. The inferior good is those good whose demand fall with the fall in consumer鈥檚 income. The normal goods are expensive than the inferior goods.

02

Explanation for the correct option (c)

The lobster is a normal good, and the chicken is an inferior good; this means that lobster is a little expensive than chicken. When the price of lobster increases, the consumer鈥檚 demand falls for lobster (negative substitution effect); however, at the same time, the demand for inferior goods will increase (negative substitution effect and income effect). It is because a higher lobster price decreases the value of the income, or in another way, the relative income falls.

The fall in relative income (real income or purchasing power) encourages the consumer to shift his/her demand to an inferior good, and, thus, the demand for chicken 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 鈥渃losing the Washington Monument.鈥� 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?

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla鈥檚 budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in the marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla鈥檚 utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers

Bart and Lisa are both optimizing consumers in the markets for shirts and hats, where they pay \(100 for a shirt \)50 for a hat. Bart buys 8 shirts and 4 hats, while Lisa buys 6 shirts and 12 hats. From this information, we can infer that Bart鈥檚 marginal rate of substitution is ___ hats per shirt, and while Lisa鈥檚 is __.

a. 2;1

b. 2;2

c. 4;1

d. 4;2

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.

The price of cheese rises from \(6 to \)10 per pound, while the price of wine remains \(3 per glass. For a consumer with a constant income of \)3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effects.
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