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a)
i) Normal goods are goods for which demand goes up when income is higher and for which demand falls when income is lower. ...
Examples of a normal good would be cinema/theatre tickets, when income is higher more people can afford to go to these events, hence demand will rise. ... Examples of substitutes could be methods of communication, because although the methods aren’t exactly the same, perfect substitutes, they all fulfil communication. ... With the increase in price people will reduce consumption of the one more expensive good, to keep the spread of disposable income the same between all goods and services as it has been before the increase in price.
b) Initially the consumer has disposable income amounting to £1000, which we will assume is spent evenly between vodka and caviar, with £500 being spent on each. ... When a consumer chooses between two goods they are constrained by the price of the goods and their income, indifference curves interact with the consumers budget constraint to determine how much of each good will be consumed. ... The budget constraint will pivot downwards in relation to this increased price of caviar, there will be a brand new equilibrium, where there is a tangency between the budget constraint and a third indifference curve, this equilibrium will possibly still be greater than the consumers original, hence total utility for the consumer has been increased through an increase of income to £1500.
Approximate Word count = 1087
Approximate Pages = 4.3
(250 words per page double spaced)
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