Income and substitution effects (12 points) GLS Ch5 P11 (Edition 1, P19). Brady, who has...

Question

Income and substitution effects (12 points) GLS Ch5 P11 (Edition 1, P19). Brady, who has ordinary-shaped indifference curves, buys 16 ounces of salt each year. Even when the price of salt doubles, Brady continues to purchase exactly 16 ounces. (a) (3 points) True or False (and explain): Salt is neither inferior or normal to Brady. (Hint: Draw a graph showing the income, substitution, and total effects.) (b) (3 points) What is Brady’s price elasticity of demand for salt? (c) (3 points) What can we say about Brady’s income elasticity of demand for salt? (d) (3 points) What can we say about the substitution and income effects of a change in the price of salt?

Robert · Accepted Answer

Solution-A
This statement is False because the effect of substitution is not positive or always negative. The effect of income should be positive, for remaining the same optimal bundle of 16 ounces. So salt is related as the inferior good.

Income and substitution effects (12 points) GLS Ch5 P11 (Edition 1, P19). Brady, who has ordinary-shaped indifference curves, buys 16 ounces of salt each year. Even when the price of salt doubles,...

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