College Microeconomics- Help!!
Defend or refute the following statements:
a. "If the income and substitution effects of a rise in the price of a good both cause consumption of the good to fall, the good is inferior"
b. "A peasant farmer allocates his entire budget to two goods; rice and beans. If rice is an inferior good."
c. "Increases in interest rates increase the utility of net savers, but decrease the utility of net borrowers.
Both persons A and B, have identical preferences, and identical wage rates. A has no non-labor income, but B receives a non-labor income (from her husband's pension). Assuming that leisure is a normal good, who will work more hours??
Thanks so much!!
Solutions to income and substitution effects, utility functions.
a and b are false for sure.
the demand for inferior good increases when income increases. in your question however the price for the good increased. thus your purchase power decreases. If the good would be inferior then the demand would increase. but because consumption fell, you are dealing with a normal good.
it does not make sense to have two inferior goods EVER. you are solving a choice problem (i.e. which good should you buy if your income decreases?). if you would have two inferior goods and income decreased, you would not care what to buy, you would buy both by definition. Or you would have to introduce a third good.
for c: true
because interest rate increases it is relatively expensive for an individual to use money. thus he will be better of by becoming net lender. of course, the net borrower will become worse of by borrowing at a higher interest rate.
i hope this helps.
PS: are u taking econ 326??? at cp??? lol