Question
John eats rice that costs $5 per pound and pasta that costs $10 per pound. The relative price of 1 pound of pasta is 2
John eats rice that costs $5 per pound and pasta that costs $10 per pound. The relative price of 1 pound of pasta is 2 pounds of rice. At their current prices, John consumes 1 pound of pasta and 2 pounds of rice. Due to some technological advances in rice cultivation, there has been a fall in rice prices from $5 a pound to $2 a pound. The relative price of 1 pound of pasta has now increased from 2 pounds of rice to 5 pounds of rice. a. Assuming both goods are normal, graphically show John's behavior before and after the fall in rice prices, by clearly indicating: i. John's initial optimum choice ii. John's new optimum choice b. In words, what impact do income and substitution effects have on John's decision? (Hint: Explain each effect's mechanism separately)
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Introduction To Management Science
Authors: Bernard W. Taylor
13th Edition
0134730666, 978-0134730660
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