In a typical month, a family buys six bags of candy bars as snacks when the price of a bag costs $4.00. When the price of the candy bars falls to $3.00 a bag, the family buys seven bags of candy bars a month. When the price of a bag of candy bars rises
to $6.00, the family buys three bags a month. Answer these questions: (a) How did the fall in the price affect real income in terms of bags of candy bars? (b) How did the rise in the price affect real income in terms of bags of candy bars? [Hint: How many bags of candy bars could the family buy in situation (a) and in situation (b) without changing the amount they spend on candy bars in a typical month?
Please provide the best answer for the statement.
In the typical month, the family spends $24.00 on bags of candy bars ($4.00 ? 6 bags). (a) When the price of a bag falls to $3.00 a bag that means real income measured in terms of bags of candy bars has increased by 2 bags because the family can now afford to buy 8 bags instead of 6 with the $24.00 they typically spent on candy bars. However, they decide to purchase only 7 bags ($3.00 ? 7 = $21.00), so the other $3.00 can be spent on other goods. (b) When the price rises to $6.00 a bag, that means that real income measured in terms of candy bars has fallen by 2 bags because the family can now afford to buy only 4 bags instead of 6 with the $24.00 typically spent on candy bars.
You might also like to view...
The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a ________
A) inflationary gap B) long-run equilibrium C) recessionary gap D) full-employment equilibrium
Rational expectations theory is also known as the Friedman fooling theory
Indicate whether the statement is true or false
Using the concept of the budget constraint and indifference curves, explain how a consumer maximizes total utility.
What will be an ideal response?
When the absolute price elasticity of demand equals 0.9, demand is
A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information.