Question

1.Now state legislators want to make predictions about how changes in consumers’ budgets will impact their consumption behavior. If school supplies and salty snacks are both normal goods with school supplies on the x-axis of the graph and salty snacks on the y-axis, explain how a decrease in consumers’ budgets would impact the consumption of school supplies and salty snacks.

a) Suppose instead that state legislators think school supplies are an inferior good. If consumers’ budgets decrease, explain what would happen to the consumption of both school supplies and salty snacks

Answer 1

1. If school supplies and salty snacks are both normal goods, the consumption of these goods will increase with an increase in the consumer budgets (incomes) and will decrease as consumer incomes decline.

As the budget of consumers declines, their Budget Line will shift to the left (BL1 to BL0). The Indifference curve (IC0) will no longer lie on the new budget line as it is out of bounds for the consumer. Even though they would like to enjoy a higher amount they have budget constraints. Thus they will now lie in IC1 and their equilibrium will also shift from E0 to E1.

a) If school supplies are an inferior good, with a decrease in incomes and budgets of consumers, the consumption of school supplies will increase. (inferior goods have a negative relationship with Income). If the income would be increasing, the consumption of school supplies would be decreasing. However salty snacks are normal goods. Thus with a decrease in income, consumption of salty snacks would decrease and that of school supplies will increase.

With a decrease in income, the quantity of salty snacks decreases from Y1 to Y2 and that of school supplies increases from Q1 to Q2.