Question

Louie purchases the same quantity of Bones even after the price of bones rises. (That are all informations as mentioned in the exam)

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.Since consumption/demand for bones does not change with a change in price, the demand and consumption curves for bones will be a straight line parallel to the y axis.

b. Both income and substitution effect are zero as comsumption doesn't change wiith price.

c. Ideally, when price of a good rises, its consumption falls. This follows from the Law of Demand. In this case though, an increase in price doesn't affect the consumption of bones which shows bones is neither an inferior nor a normal good.