The Following Data Pertain to Products a and B, Both

question 53

Essay

The following data pertain to products A and B, both of which are purchased by Madame X. Initially, the prices of the products and quantities consumed are:
P_A = $10, Q_A = 3, P_B = $10, Q_B = 7.
Madame X has $100 to spend per time period. After a reduction in price of B, the prices and quantities consumed are:
P_A = $10, Q_A = 2.5, P_B = $5, Q_B = 15.
Assume that Madame X maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Madame X to put her back on the original indifference curve, she would consume this combination of A and B:
Q_A = 1.5, Q_B = 9
a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect.
b. Determine if product B is a normal, inferior, or Giffen good. Explain.

---

Definitions:

Wage Paid

The compensation given to labor for the service provided, usually calculated as an hourly, daily, or per task basis.

Market

A place or system where goods and services are exchanged between buyers and sellers.

Soybean Workers

Individuals engaged in the cultivation, maintenance, and harvesting of soybeans.

Equilibrium Wage

The wage rate at which the quantity of labor demanded by employers equals the quantity of labor supplied by workers, resulting in no labor surplus or shortage.