Can you determine the income effect of the price increase? If yes, how much is it? If not, why not? Julie buys food and other goods. She has an income of $400 per month. The price of food isinitially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change.To help Julie out, her mother offers to send her a check each month to supplement her income.Julie tells her mother, "Thanks, Mom. If you would send me a check for $50 per month, I wouldbe exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and notreceiving the $50 from you."

Answered: Can you determine the income effect of…

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter6: Consumer Choice And Demand

Section6.A: Appendix: Indifference Curves And Utility Maximization

Problem 2AQ

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Can you determine the income effect of the price increase? If yes, how much is it? If not, why not?

Julie buys food and other goods. She has an income of $400 per month. The price of food is
initially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change.
To help Julie out, her mother offers to send her a check each month to supplement her income.
Julie tells her mother, "Thanks, Mom. If you would send me a check for $50 per month, I would
be exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and not
receiving the $50 from you."

Expert Solution

Step 1

Income effect(IE) is the change in the amount of a good because of the increase in its price reduces the purchasing power of the consumer. IE can be either negative or positive depending whether the good is normal or inferior.

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