Carlos consumes only cheese and crackers.

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Carlos consumes only cheese and crackers.

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Carlos consumes only cheese and crackers.

a. Could cheese and crackers both be inferior goods for Carlos? Explain.

b. Suppose that cheese is a normal good for Carlos while crackers are an inferior good. If the price of cheese falls, what happens to Carlos’s consumption of crackers? What happens to his consumption of cheese? Explain.

Explanation & AnswerSolution by a verified expert

A
Here is a tip:
Inferior goods are those goods whose quantity consumed decreases with an increase in income.

Explanation
Individual C consumes less of both goods with a rise in income if they are inferior goods, shifting his consumption bundle to a lower indifference curve. But since his income increases, he must consume more of at least one good to achieve a higher satisfaction level instead of shifting to a lower IC. Therefore, both goods cannot be inferior for Individual C.

Verified Answer
No, both cheese and crackers cannot be inferior goods at the same time for Individual C. When the income increases, the quantity consumed of at least one good must increase. If both the goods are inferior, then the quantity consumed of both the commodities will decrease with the rise in income. This will lower Individual C's satisfaction compared to what it was before.

B
Here is a tip:
With the increase in income, a normal good's quantity consumed increases, whereas an inferior good's quantity consumed decreases.

Explanation
When the price of cheese falls, Individual C will purchase more cheese since it is a normal good.

Due to the substitution and income effect, the individual will purchase lesser crackers. This is because crackers have become relatively expensive compared to cheese and Individual C will substitute crackers with cheese. Along with this, due to the fall in the price of cheese, Individual C's purchasing power (real income) increases and he will buy less crackers since it is an inferior good.

Both the substitution and income effect leads to a fall in the quantity consumed of crackers. Therefore, Individual C will buy more cheese and less crackers.

Verified Answer
Due to the fall in the price of cheese, Individual C will substitute it for crackers and consume more cheese. Due to the fall in the price of cheese, Individual C's purchasing power increases leading to a rise in real income. He will buy more cheese since it is a normal good and less crackers since it is an inferior good, with the rise in real income.

Thus, both the substitution and the income effect leads to a rise in quantity consumed of cheese and a fall in quantity consumed of crackers for Individual C.

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