Answer to Question #51483 in Microeconomics for ALEXANDER

Question

Mr. Hassan’s demand function for rice is given by
X = 15 + M (10P) -1
Where X = amount of rice demanded, M = income of the consumer, P = price of rice.
Originally, the income of Mr. Hassan is 4,800 per month and the price of rice is kshs. 120/kg. If the price falls to kshs 100/kg, calculate to total effect (TE), substitution effect (SE) and Income effect (IE) emanating from this change in price

Answer 1

X = 15 + M (10P)^-1
M = $ 4,800 per month, P = $120/kg.
If the price falls to $ 100/kg:
1) the total effect TE = X2 - X1 = 15 + 4800/(10*120) - 15 - 4800/(10*150) = 0.8 kg
2) substitution effect SE = Xh - X0 = 15 + (4800*150/120)/(10*150) - 15 - 4800/(10*120) = 0 kg
3) income effect IE = X1 - Xh = 15 + 4800/(10*150) - 15 - (4800*150/120)/(10*120) = 0.8 kg