Chapter 10, Problem 1BCQ

To determine

Concept Introduction:

Normal goods: All those goods whose demand increases with an increase in income is known as normal goods. Take an example of milk, if the income of an individual increases, then its demand will certainly increase.

Inferior goods: All those goods whose demand decrease with an increase in income is known as inferior goods. Take an example of low quality clothes, if the income of an individual increases, then demand for such goods will decrease.

Substitution effects: In this case, the demand of a good increases if the price of its substitute good increases and vice versa. Take an example of tea and coffee, if prices of tea increase, then the demand for coffee will increase.

Income effects: It states that the demand for normal goods and the income are directly related, which means that when the income of a consumer increases, the demand for normal goods will also rise and vice versa.

Explanation of Solution

Example of normal goods:

In the given case, standard happy meal including a quarter cup of slices of apple and excluding caramel sauce is a normal good because its consumption increases with an increase in income.

Example of inferior goods:

In the given case, happy meal with soda as beverage is an inferior good because consumption of such meals decreases with an increase in income.

Substitution effect:

In the given case, due to the substitution effects, if the prices of a happy meal with soda increases, then the demand for standard happy meal will increase. Now, people have incentives to consume more standard happy meal than a happy meal, as the price gap is less.

Income effect:

In the given case, if income of the people increases, then they will prefer standard happy meal than happy meal and hence, McDonald’s would increase its market share.

Conclusion:

Thus, the above examples for normal goods, inferior goods, substitution effect and income effect are stated in the given case.