4. Ding How uses tofu and vegetables as its only two inputs. These are both norm

Question

4. Ding How uses tofu and vegetables as its only two inputs. These are both normal inputs with initial prices Ptofu 3- and Pvegetables4.Suppose that the prices change to become Ptofu 2 and Pvegetables teri 2. a. In which direction will the substitution effect change Ding How's amount of tofu and vegetables use b. In which direction will the scale effect change the Ding How's amount of tofu and vegetables used? C. Can we say conclusively whether Ding How will use more or less tofu? More or less vegetables?

Explanation / Answer

Ans

1 it increase consumption of Tofu since it becomes relatively cheap(related ve price of 4/3 to 2/2) and decrease consumption of vegetable since they become more dear

2 It will increase consumption of both goods

3 He will definetly use more tofu because here substitution effect and scale effect increases consumption We can't say anything conclusively about vegetables  

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