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Unformatted text preview: budget line. 3 (a) Suppose we have the original situation in question (2) above. David decides to consume 30kg of beans. How many kg of peas does he consume? (b) The price of peas then falls from 40p to 20p per kg. David decides to consume 30kg of beans. How many kg of peas does he now consume? (c) With the price of peas now at 20p per kg, David tells us that he would have been just as well off as he was originally (under 2(a) above) if the price of peas was 20p and his income was 7.60, in which case he would buy 20kg of beans. Calculate the income and substitution effects on the quantity of peas of the fall in the price of peas in (b) above. (d) Are either beans or peas an inferior good? Key terms to review and understand: Utility Indifference curves Marginal rate of substitution Marginal utility Budget line Income effect Substitution effect Inferior good...
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- Spring '12