4. There are two consumers in a market, and two goods (X and Y). Consumer 1\'s d

Question

4. There are two consumers in a market, and two goods (X and Y). Consumer 1's demand for good X is given by: C1 = 15 – 3P, – P, + .211. Consumer 2's demand for good X is given by: T2 = 20 – 2P, – .5P, +.112. If we transfer 5 units of income from individual 2 to individual 1, what will happen? (a) The equilibrium price will increase by 5. (b) The equilibrium quantity will increase by .5. (c) The demand curve will shift right by .5. (d) The total amount of income between the two individuals is unchanged, so noth- ing will happen.

Explanation / Answer

C is correct

Individual 1's coefficient of income is 0.2 and individual 2's coefficient of income is 0.1.

Total effect on demand= 0.2*5 - 0.1*5= 0.5

Thus demand increases and shifts by 0.5

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