Neville’s passion is fine wine. When the prices of all other goods are fixed at current levels, Neville’s demand function for highquality claret is q = .02m − 2p, where m is his income, p is the price of claret (in British pounds), and q is the number of bottles of claret that he demands. Neville’s income is 7,500 pounds, and the price of a bottle of suitable claret is 30 pounds.
(a) How many bottles of claret will Neville buy? 90.
(b) If the price of claret rose to 40 pounds, how much income would Neville have to have in order to be exactly able to afford the amount of claret and the amount of other goods that he bought before the price change?
(c) At his original income of 7,500 and a price of 40, how much claret would Neville demand?
(d) When the price of claret rose from 30 to 40, the number of bottles that Neville demanded decreased by 20. The substitution effect (increased, reduced) reduced his demand by 2 bottles and the income effect (increased, reduced) reduced his demand by 18 bottles.