Question

Jane spends all her income on hot dogs and caviar. Her demand curve for caviar is inelastic at all prices for caviar. Unfortunately, the accident at Chernobyl has caused the supply of caviar to fall and the price to rise. What has happened to Jane's consumption of hot dogs? Explain. (Note: You should assume that the accident at Chernobyl had no effect on the price of hot dogs or Jane's preference for caviar.)

Answer 1

Solution:-

Jane spends all her income on hot dogs and caviar, that indicates demand curve for caviar is inelastic at all prices for caviar. Jane continues to consume caviar even when the price gets higher; hence she is spending a greater share of her income on caviar. Thus now she is left with a smaller portion of her income to be spent on hot dogs. Assuming hot dog prices do not fall due to the accident, at the constant price Jane quantity consumed of hot dogs would also fall.

Demand for caviar is inelastic means that Jane wil contnue buying the same amoutn of Caviar even after the increase in price of caviar rises. So the expenditure on caviar will rise.

This means that lower budget will remain for hot dogs. So expenditure on hot dogs will fall. Given constant hot dog prices, the consumption of hot dogs will fall.