Question

Louie purchases the same quantity of Bones even after the price of bones rises. (The answers posted have some mistakes that why i post it again)

a. Draw Louie's price-consumption curve and demand curve (two separate graphs!) based on this information.

b. Discuss directions and magnitudes of the income and substitution effects (or graph them clearly).

c. Are Bones normal or inferior for Louie? Explain

Answer 1

A) PCC curve shows optimal combination of two goods , as the price of one good is changed, keeping the income unchanged and the price of the other good also kept unchanged.

If bones are on the horizontal axis and the other good is on the vertical Axis then PCC will be a vertical line, since Consumption of bones is unchanged,

Demand curve for bones is also a vertical line because the consumption of bones is perfectly price inelastic.

B) since as price rise ,so consumption unchanged, hence total effect of a price increase is zero.

So no income & substitution effect is zero for bones.

For other good ,only income effect exist, due to fall in effective income , as price rise.

C) since as price rise, effectice income fall, consumption is unchanged, good is a kind of necessity, so it's a normal good

graph of PCC

Demand curve