Given one good is an inferior good, we work through income and substitution effects and a decrease in the price of the inferior good. Note that with an inferior good, the effect of an increase in income is a reduction in the consumption of that good. Thus in the two-good model with budget lines and indifference curves, we need to draw our indifference curves carefully to account for the fact that one good is inferior.
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Katya commutes to work. She can either use public transport or her own car. Her indifference curves obey the four properties of indifference curves for ordinary goods.
a. Draw Katya's budget line with car travel on the vertical axis and public transport on the horizontal axis. Suppose that Katya consumes some of both goods. Draw an indifference curve that helps you illustrate her optimal consumption bundle.
b. Now the price of public transport falls. Draw Katya's new budget line.
c. For Katya, public transport is an inferior, but not a Giffen, good. Draw an indifference curve that illustrates her optimal consumption bundle after the price of public transport has fallen. Is Katya consuming more or less public transport?
d. Show the income and substitution effects from this fall in the price of public transport.
from Krugman Wells -- Microeconomics 2nd Ed. -- Chapter 11 (Consumer Preferences and Consumer Choice), Question 14
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20 сен 2024
