The following data pertain to products A and B, both of which are purchased by Susan....

The following data pertain to products A and B, both of which are purchased by Susan. A is on vertical axis and B is on horizontal axis. Initially, the prices of the products and quantities consumed are:
PA= $8, QA= 5, PB= $6, QB= 10.
Susan has $100 to spend per time period. After an increase in price of B, the prices and quantities consumed are:
PA= $8, QA= 4, PB = $9, QB= 7.5.
Assume that Susan maximizes utility under both price conditions above. Also, note that if after the price increase enough income were given back to Susan to put her back on the original indifference curve, she would consume this combination of A and B:
QA= 10,QB= 4
a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect.
b. Determine if product B is a normal, inferior, or Giffengood. Explain.

Expert Solution

Do note that TE<0; SE<0 and IE>0 are the three necessary and sufficient conditions for proving a good to be inferior according to general economic theory relating to microeconomics.

Rahul Sunny answered 3 weeks ago

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